The Institutional Real Estate Inc Sponsorship brochure, Connected-Investor Focused, We connect people, data and insights, sponsorship, events, IREI Products
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NAREIM DIALOGUES FALL 2016 27 B A L A NC I NG T HE F ORCE S FROM W I T H I N A N D W I T HOU T Succession is a hot topic – everyone agrees that it's crucial to maintain a strong investment track record with longevity, keep talent engaged and retained, and allow owners to realize long term profits on their life's work. Most succession conversations focus on potential challenges within the fund platforms, such as founders' hesitancy to let go or share in economics, a perceived (though not always real) "shortage" of talent within a particular "vintage", and the institutionalization of real estate as an asset class over the last 30 years. There may be, however, an unexamined force – in some ways real, and in some ways perceived - at work from outside the funds: investors. Investors are considered the lifeblood of funds. It stands to reason that funds' interaction with them, and the direction provided by them – real or perceived – impacts General Partners' behavior. One of the key attributes examined by investors looking to invest with managers is their consistency: how many years has the senior leadership team been in place? How consistent has the team been? How little change has there been? Despite all the fine print and warnings that "past performance may not be indicative of future success", investors still value consistency—in personnel, in strategy, in results. A change in leadership or fund management could easily trigger a "wait and see" reaction from LPs, who may elect to sit out committing to a new fund in order to assess how the new regime performs. Managers that have changed staff or approaches are, by definition, put into a defensive position. Baked into the assessment and due diligence of investors and consultants, there may be a subtext against a crucial ingredient for future success. In short: Is a succession plan something that investors want to see, but actual succession something that they would rather not? THE DISCUSSION There is no doubt that a key part of the due diligence discussion between investors and managers is related to a firm's succession plan, whether it has a "deep bench", and alignment of interests, typically in the form of promote across the team. This does force funds to think through these issues. What may not be reflected in promote statistics, however, are qualitative motivation and retention factors within the team such as "when will I have a seat at the leadership table", and "what is my path to partnership or owning a piece of the firm?" Because the future and markets are difficult to predict, some investors may naturally focus more on questions that give them comfort surrounding the life of the fund they are investing in, such as deep bench in case of departures, and alignment of carry. As with any investment, it can be difficult to underwrite for a timeframe beyond that and, practically speaking, the priority is preserving the current capital at play, even if the goal is programmatic and ongoing fund participation. RISK AVERSION AMONG INVESTORS IMPACTS RISK AVERSION OF FUNDS According to recent Preqin investment data, the real estate industry has seen 715 funds raised between in 2013 and 2015, garnering more than $329 billion in capital investment. While there has clearly been a huge amount of fundraising in the Real Estate private equity space, almost anyone who is a capital raiser (or founder, or portfolio manager, who is on the road accompanying them), will tell you that it's not easy. It takes longer and requires many more conversations and answered questions—as it should, in many ways. However, when it's not easy, there may be the inclination on the part of funds to mitigate any risk in the presentation of the firm, namely by focusing on aspects of consistency, and professionals within the firm that are familiar.