The private equity fund-raising market is characterized by limited capital availability and an abundance of investment vehicles in the market, a classic case of a supply and demand imbalance. Investors must sort through the offerings, narrow down their options and then select the investment that they believe best matches their objective and strategy. How do LPs go about this winnowing process, and what determines the winners and losers?
From the Current Issue
For more than 10 years now, this column has been warning (and I’ve been warning from the podium at our conferences and elsewhere) about the impending shift from defined benefit–based pension funding schemes to defined contribution plan–type schemes here in the United States and elsewhere.
This time is different, very different. And to be successful in the marketplace, investors and managers must reset expectations and adjust strategies. What’s worked in past cycles may not apply — demand is changing, technology dampens growth in the commercial sector, the industry does not require as many middlemen and returns will be lower. Advantage goes to proven operators with hands-on skill sets to manage properties and deliver performance as well as a few financial giants, which attract capital from institutional investors, seeking safety in gold-plated brands. Boutique allocators looking for value-add or opportunistic returns gain little traction — many cannot get out from under track records eroded in the recent crash. And no one wants to take a chance on new players. Of course, advisers who peddle financial structures over real estate acumen need not apply either.
Like fashion trends, retailers come and go, depending on the changing economy and shifting consumer tastes and preferences. The recent economic recession certainly has taken its toll on the retail industry; many retailers have struggled due to a sluggish economic environment, a continuing weak job market and the resultant pullback in consumer spending.
In light of recent and ongoing events in global capital markets, institutional investment managers have begun to look at portfolio risk differently. Real estate portfolios inevitably will be part of portfolio-wide changes in risk management practices. One element of the change is that instead of buying assets that have some level of risk, investors are seeking appropriate amounts of risk by selecting the asset mix that provides that level. It is a subtle difference but an important one. Making that distinction requires that the assets be understood in terms of their absolute risk as opposed to their relative risk.
Buildings consume a large amount of energy, and until recently, real estate energy bills were viewed as an uncontrollable expense. New software and technology are changing this. Investors now realize that energy expenses can be reduced through any of five paths: capital investment (retrofits), utility incentives, open-market procurement, occupant behavior change and operational improvement.