Alignment of interest: Are we focusing on the wrong thing?
It has long been a priority of most investors to ensure the interests of their investment managers are closely aligned with their own interests. These investors are attempting to solve for what is commonly referred to as “the agency problem”. According to Investopedia, “the agency problem is a conflict of interest inherent in any relationship where one party is expected to act in another’s best interests.”
Within institutional real estate investment, the agency problem usually refers to a potential conflict of interest between the investor who supplies the capital and the investment manager who executes the agreed-upon investment strategy for a fee. As a steward and fiduciary, the investment manager is obligated to make decisions on behalf of its capital-provider clients that will maximise investor wealth — even though it’s actually almost always in the investment manager’s best interest to maximise its own wealth. And therein lies the problem.