Investors - MAY 7, 2018

Q&A: Belay Investment Group discusses mentoring program for emerging managers

by Andrea Zander

Belay Investment Group, along with its affiliate, AVP Advisors, LLC (AVP), is a real estate investment management firm that for more than 13 years has pursued value-added real estate strategies designed to deliver superior risk-adjusted returns to institutional investors.


Below is a Q&A with Barry Chase, a founding member and CEO of Belay, and Suzanne West, who recently transitioned to an external advisory role but who was also a founding member, along with Amy Ko and Eliza Bailey, to discuss how Belay’s mentoring program for emerging managers leads to exclusive access to differentiated deal flow while ensuring optimal execution of value-added strategies.


1. What makes Belay Investment Group unique?

Chase: Let me start by summarizing Belay’s value-added strategy, which is to invest in commercial real estate assets — equity or structured debt — in specific U.S. markets positioned to benefit from long-term economic and demographic trends driving tenant demand. We are generally targeting properties in the less competitive $10 million to $50 million range, across all major and select niche property sectors.

Belay currently invests exclusively on behalf of the California State Teachers Retirement System (CalSTRS), which shares the conviction that combining an experienced and fiduciary-minded investment firm, such as Belay, with local operating partners and sector specialists through properly structured partnerships, provides greater access to opportunities, improved risk management, and the potential to enhance investment returns through successful execution of business plans.

Drawing from our collective experiences as investors and fiduciaries, we source the most talented local operating partners and form strategic partnerships to gain access to differentiated and compelling deal flow.

What makes us unique is twofold:

1.) How we execute our strategy, deploying capital exclusively through nondiscretionary programmatic joint ventures (PJV) that provide for exclusive access to the deal flow, talent and resources of our partners, resulting in a well-capitalized, locally entrenched partnership able to identify opportunities and transact efficiently ahead of market forces, capitalizing on first mover advantages and providing an edge that is imperative in today’s highly competitive market.

2.) The highly collaborative nature of our relationships designed to support the growth and development of our partners as fiduciaries. We are more than a simple capital provider, as mentoring these firms through the adoption of institutional best practices in areas of corporate governance, accounting and reporting serves the dual purpose of strengthening Belay’s investment performance and providing the management teams with a path to growth and the establishment of direct relationships with institutional investors such as CalSTRS.

West: A key element to Belay’s risk management is the enhanced control rights and transparency into firmwide operations not customary in one-off joint ventures of allocator funds and separate accounts. This positions Belay to more effectively monitor the platform risk of our partners and to identify and address potential management issues before performance of the assets is negatively impacted.

What sets Belay’s unique approach apart from the conventional allocator model is the conviction that generating value for Belay’s investors extends beyond intensive investment and asset management to making stronger investment partners, resulting in a win-win for all parties, including the industry overall.


2. How do you execute your strategy?

Chase: We start by identifying target markets and property sectors that are consistent with employment and population growth as well as, evolving live/work/play trends. Then, we proactively source talented firms or teams successfully operating below the institutional radar. We look for high-caliber firms that are locally entrenched and well positioned to capitalize on market shifts early where others may lose out. The local market participation and insights at a micro-market level are important in evaluating the risks as well as the opportunities associated with shifting market dynamics.

We believe that underwriting investment partners is as important as underwriting property investments because operating platform risk has historically been underestimated. As a result, all operating partners under consideration for a PJV investment mandate are subject to a rigorous underwriting and approval process. To the extent that deficiencies in corporate governance, organizational staffing and/or accounting and reporting infrastructure are identified, a mentoring program to enhance an operating partner’s ability to achieve their investment objectives for the property investments and the venture is established and agreed to by both parties.

Belay’s capital commitment for each PJV is the result of its significant due diligence process and is generally structured to allow for a two-year investment period; with the commitment size based on the particular market, property sector and related strategy as well as the firm’s bandwidth and expected ability to generate deal flow consistent with the agreed upon strategy. Thus, PJV commitments may range from $25 million to $100 million-plus.

Belay maintains full discretion over its PJV commitments, including investment and major management decisions affecting every property investment, and retains the exclusive right to terminate the PJV commitment as warranted for performance-related issues or even in the event that the strategy is no longer viable. The ability to remain nimble and effectively “turn off the spigot” to reallocate the capital in response to shifting market opportunities is important.

Belay’s disciplined investment approach adds value through each phase of the investment and management cycle, starting with an acquisition process that focuses on basis risk and appropriately pricing risks and opportunities as our investment team works in tandem with our partners to evaluate individual property investments.

West: Many firms have demonstrated a willingness to forego existing allocator relationships, ascribing significant value to Belay’s PJV capital, as sellers have proven reluctant to take on risk of buyers relying on deal syndication to source equity capital.


3. How did you create this mentor program to help build this link between emerging managers and institutional investors?

Chase: Prior to joining in the launch of AVP, I was the president of the western division of a large development company. We had six regional offices run by local partners, each of which reported up to me. What I learned through my job overseeing the development company was that I was working with a lot of very skilled development partners that were very good at finding deals and executing the business plans. However, they were not particularly good at risk management, nor were they very disciplined in their approach to underwriting investments or in understanding other institutional best practices. So I thought, “What is the best way to basically capture the talent of these operating partners and to help them become more institutional?”


4. Why is it hard for operators, emerging managers to gain access to institutional capital?

West: If you look at the fundraising environment, the trend really favors larger funds and more established firms with longer track records. So, it is hard for new or younger firms to gain access to institutional investor capital. The trend is going against them, which is ironic because investors see value in gaining direct access to the talent, to the deal sourcing and the enhanced control position. Unfortunately, efficiency drives these investors to take a different approach. For example, they want fewer managers with the ability to make larger commitments. Belay offers a bridge for smaller firms with talented management teams to access the institutional investor community.

Chase: With our current venture, we have made commitments to three firms, none of which had an institutional track record or experience managing discretionary capital for institutional investors. Even though they each had a strong management team, it would have been difficult for them to raise an institutional fund or get the support of the consulting community. The benefit of our underwriting process is that we can really dig deep through our proprietary forensic analysis and essentially build a track record from scratch if warranted since it is difficult for these firms to attract institutional capital without having an under-writable track record, so to speak.


5. What is Belay’s culture?

Chase: Highly collaborative, both amongst our team and with our partners. Paramount to meeting the long-term objective of our program as supported by CalSTRS is managing the risks of investing with firms who may be in transition, either culturally in adopting a fiduciary mindset or as they enter a new stage of growth. Therefore, the relationship must be solid and rooted in mutual respect to survive the inevitable friction when we disagree with the merits of a deal or turn down an investment recommendation. Because none of us are bigger than real estate market cycles, we need to select our partners carefully and create a spirit of partnership so we can work together closely to make the best decisions on behalf of the real estate.

West: With success, Belay will ultimately be disintermediated by certain PJV partners who evolve and on their own merits are able to establish direct relationships with institutional investors, whether as a comingled fund sponsor or through other PJVs. Thus, Belay must be constantly sourcing great talent and differentiated deal flow, competing with other capital providers along the way.


6. What does the portfolio look like today?

Chase: Belay has invested roughly $120 million with three PJV partners and acquired assets ranging in size from $6 million to a projected all-in capitalized cost of $37 million, including multifamily, workforce housing, and urban infill retail, office and mixed-use properties. Each asset is located within a Belay “target market” and within predominantly urban or close-in transit-oriented suburban markets appealing to millennials and/or the growing ethnic diversity across the U.S. demographic spectrum.

Risks are mitigated with capital invested across the value-added spectrum of operating properties from those requiring minor renovations to a couple of major redevelopments, and all are fully “in-line” with the Belay’s investment thesis and strategy:

  • High-caliber operators and sector specialists, each possessing specialized experience in the fund’s target markets and sectors
  • Diversity of ownership, as each partner is a minority or majority woman-owned firm and reflective of the communities they represent

The three PJV relationships include:

  • Arc Capital Partners to pursue adaptive re-use and/or value-added repositioning of urban infill, middle market retail, multifamily and creative office mixed-use properties driven primarily by millennials demand drivers in select transit-oriented Southern California and Texas cities.
  • Eagle Property Capital to capitalize on the need for quality workforce housing in high-growth markets, catering to middle-income renters and capturing the significant growth of the middle-income segment of the Hispanic population, which is projected to account for more than half of the growth in renter households through 2023.
  • L&L Investment Partners to pursue urban or infill value-added and/or opportunistic development projects narrowly focused on the Portland, Oregon, market which is experiencing strong employment and population growth around a high-caliber workforce dominated by millennials driving demand for creative office, multifamily and mixed-use properties with optionality to cater to tenants and residents seeking live-work-play neighborhoods accessible to amenities.

West: Strategic guidance and mentoring is adding value and mitigating risks across each PJV as Belay works collaboratively with each of the partners addressing both opportunities and challenges driving property-level performance, resulting in real-time modifications to redevelopment plans as well as staffing and allocations of resources.

The relationships are strong and productive and CalSTRS is pleased with the performance of each individual asset as well as how well our PJV partners are performing. As a matter of fact, CalSTRS has met with several of our partners and is supporting our decision to make a follow-on commitment to Arc Capital Partners.


7. What’s next?

Chase: CalSTRS is moving forward on an additional $100 million equity commitment, which brings its total commitment to Belay to $300 million and allows Belay to focus on generating investment opportunities exclusively for them.

West: Launching Belay alongside Barry, Amy and Eliza was an exciting opportunity for me that drew upon my many years of industry experience including buy- and sell-side investment activities through senior roles at various investment management firms and the State of Connecticut Trust Funds, along with my experience as a co-founder in building Park Madison Partners.

The significant commitment by CalSTRS serves as a resounding endorsement of the Belay platform, its team and strategy. With Belay’s shift away from capital raising, I will continue to provide my support to the firm as an external adviser and am very excited at the opportunities that lie ahead for both Belay and myself.

I have launched Epic Advisory to provide strategic advisory and capital raising–related services to real estate operators and investment management firms, both established and emerging.


Suzanne West recently launched Epic Advisory and will be speaking at the 2018 Inaugural iREOC Annual Meeting on May 8. For more event information, click here.

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