Spoiled milk? What to do when funds expire

Milk splashThe heady days of fundraising prior to the global financial crisis saw about $91 billion in capital raised by 184 real estate funds in the Asia Pacific region, with 91 percent of these offerings in closed-end funds, roughly 84 percent of which are likely to expire between 2013 and 2016, according to CBRE Global Research and Consulting’s October report, The Great Wave of Fund Expiration: What Are the Options Besides Termination?

With fund expirations expected to peak during 2015–2016, CBRE expects the Asia Pacific market will only be able to absorb about 75 percent of created market liquidity from asset dispositions during this timeframe.

To secure returns, the critical nature of this reduced market absorption suggests fund managers will need to carefully consider fund positioning and possible options beyond fund termination, such as fund extension, secondary trading, IPOs and restructuring, notes the report.

GPs with vintage-year funds that are letting their LPs know about the options being considered are less likely to potentially spoil the relationship.

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Jennifer-Molloy91x119Jennifer Molloy is editor of The Institutional Real Estate Letter – Asia Pacific

Preparing tomorrow’s leaders today

Institutional Real Estate, Inc. held its first annual Springboard conference this month at Cavallo Point in Sausilito, Calif. Springboard is a new leadership development program for the next generation of industry leaders. These up-and-coming leaders have been nominated by senior executives at their respective organizations because they have been identified as professionals with leadership potential.

This event was a nice way for these up-and-comers to get to make vital connections that they will most likely have the rest of their careers. Needless to say, the event was wonderful, the weather was perfect and the attendees got to be a part of the San Francisco Giants making it into the 2014 World Series during a boat trip on the San Francisco Bay (see photo below).

Here are a few highlights from the event:

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DenisewebfinalDenise DeChaine is special projects editor at Institutional Real Estate, Inc.

What is leadership?

What defines a leader? It’s interesting to note that true leaders seldom lay claim to being leaders, even though they are. After all, if they really are a leader, it’s usually clear to everyone and indisputable. Leaders, therefore, have no need to make claims; the facts of who they really are and the leadership position they already clearly occupy speak for themselves.

If you look at the promotional material produced by most firms in the real estate business, however, you won’t have to read very far before you’ll stumble upon words like “leader,” “leading,” or something of a similar ilk. Early on, you’ll tend to see (completely unsubstantiated) claims such as “Our company is one of the leading firms …” or “Our company is the leader in …”

(Of course, if you’re not the acknowledged, undisputed leader in your field, opening your pitch by making claims that you are undermines the credibility of just about everything else that follows.)

If nobody else is following your “lead,” claiming to be a leader doesn’t hold much water either. Think about it. Who wants to be number two or three? (Now, if you happen to be number two or three in your field, that’s not a bad thing. It’s certainly better than being number four, or five, or one hundred. But it doesn’t make you a leader if nobody’s really gunning for your position. The fact is, they aren’t even looking at you. They’re all looking at — and gunning for — the top position, for the leader’s position. In other words, even if you’re number two, who’s following? And if nobody’s following, by definition, you’re not really a leader.)

On the other hand, there’s nothing really wrong with being a follower. In fact, followers actually are pretty important; you can’t be a leader without them. You might even argue that followers actually “make” leaders.

As the music business entrepreneur Derek Sivers noted in his classic presentation for TED, “How to Start a Movement”: “The first follower is what transforms a known nut into a leader.”

The truth of the matter is, the vast majority of firms that claim to be leaders in their field are not. (On the other hand, they aren’t always “known nuts,” either, because most aren’t really doing anything different to set themselves apart from the crowd.)

Now, if you aren’t the acknowledged, undisputed leader in your field, by definition, you really only have a few choices. One is to do nothing different and hope for the best (this is called denial). Another is to do your best to emulate what the leaders are doing and, again, hope for the best. (But this is called “following,” not “leading.”) The third is to attempt to leapfrog the leader through innovation. And that’s what really sets leaders apart.

The problem is, innovating can be risky. Your innovations might not produce the desired results (in which case you could end up looking like just another “known nut”). Not surprisingly, therefore, attempting to truly innovate too often ends up being the road less traveled.

So how do leaders achieve their leadership positions? I’ve been thinking about this a lot lately.

Clearly, they don’t do it by asking what best practices look like. (That’s a followers question if I’ve ever heard one.)

Instead, true innovators start by trying to identify what they think their clients will love, what will blow their clients’ hair back. You typically don’t find out what that is by conducting market research or focus groups. (“If I’d asked my customers what they really wanted, most would have said, ‘a faster horse,’” Henry Ford reportedly once said.)

Whenever we’re launching a new product or service, it’s always been fascinating to see how people respond. If the product is any good (and sometimes, admittedly, it isn’t), a small minority typically can be counted on to always be the first to step up and get behind the launch. They almost instantly see the value, and typically don’t care what other people or companies think or are going to do. The vast majority of folks, however, almost reflexively respond by asking, “Who else is doing it?” And then they wait to see who does. Again, nothing wrong with that. But the very question defines them as followers, not leaders.

Leaders also realize that the bar for what customers will love is almost always in the process of being raised. Consequently, leaders never rest. They tend to view complacency as the enemy and constantly seek to push the envelope when it comes to innovation.

Too often, when followers do attempt to emulate leaders, they end up missing one or more critical elements in execution. They get the superficial elements, but miss the whole point of what the leader is trying to do. So usually — although not always — leaders continue to lead while followers continue to follow.

Leaders also don’t tend to wait for situations to change before taking action. They think carefully about what’s happening now. And they tend to anticipate turns in the road before they’re upon them. (As Bernard Winograd, the former COO of Prudential, once noted, “A turn in the road isn’t the end of the road unless you fail to make the turn.”) The problem is, you’re unlikely to make the turn if you don’t see it coming. Leaders are always looking out ahead.

Followers are always trying to cover their rear ends, always trying to avoid doing anything that might undermine their current position. Leaders are always sticking their necks out, always taking risks that absolutely could undermine their current position, in hopes of enabling them to continue to stay ahead of the pack. (When leaders lose this instinct, they become vulnerable to challenges from below. But those challenges almost always come from new emerging leaders, not from the pack of followers)

So, in the final analysis, how can you tell a leader from a follower? Don’t look at what they say. Look at what they do. They lead.

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GeoffFinalv5forwebGeoffrey Dohrmann is president and CEO of Institutional Real Estate, Inc.

It’s OK to be the second-to-last buggy whip maker

A recent article in The Wall Street Journal, “Pen and Pencil Makers Go Back to Drawing Board”, describes how some of these manufacturers are learning how to adapt, survive and thrive to the new age of smartphones, tablets, phablets and laptops. This includes Crayola of Crayons fame; Faber-Castell, the world’s oldest pencil maker; and Bic. Each one of these is manufacturing “digital friendly” products as a means to meet this challenge head on. On the other side, Dixon-Ticonderoga, manufacturer of the ubiquitous “Number Two” pencil, has decided to stay the course and not enter the fray.

Only time will tell who will come out on top and whether Dixon-Ticonderoga has made a sound business decision. The other firms are entering an ever-changing marketplace, and the competition will be fierce as they see how their long-term planning pans out.

This leads to an interesting dynamic in the commercial real estate industry. As an industry, real estate remains a brick-and-mortar investment vehicle no matter how many different ways and cocktail concoctions are developed around it. It is a “real asset,” and that is its true value proposition. There are many technology companies that support real estate, including portfolio, asset and property management software applications. There is also the new capital-raising structure known as “crowd funding” that utilizes technology to bring new investors to this “real asset.”

The pen and pencil manufacturers are seeking new opportunity in an ever-changing marketplace and dealing with the needs of their customer base. And as we look to find our way through this same dynamic, it is probably better to serve our customer base through making properties more adaptable and usable for tenants instead of figuring out how to merge real estate and technology. Technology is utilized to support real estate, not become real estate. It’s a fine distinction between the two, but doesn’t take much gray matter to figure it out.

In our industry, the last buggy whip manufacturers will be the ones who don’t realize soon enough who occupies the space and what their business models are evolving into. And there is still plenty of evidence that there are those in the industry that haven’t worked this through, yet.

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JS_91x119Jonathan Schein is senior vice president and managing director of business development with Institutional Real Estate, Inc.

Four big lessons from the downfall of Bill Gross

Before Brutus could plunge the dagger deep inside Bill Gross’s thoracic cavity, the world’s most famous bond manager jumped ship. Gross took up residence at Janus while using the fatuous cover story that he wanted to focus more on investing and less on managing. (Who has ever known a control freak of Gross’s proportions wanting to give up making the decisions?)

Lots of blood has run through the moat at PIMCO — the organization he helped co-found and that served as his castle — and during that time observers have learned many lessons. Here are four:

  1. Be willing to change. The financial market had left Bill Gross behind, and he was not a man who embraced change. Like the football coach who still believes that progress is three yards a cloud of dust, Gross wouldn’t give up his losing game plan. A new generation of managers wanted PIMCO to branch into some new areas, but Gross would have none of that.
  2. Protect your legacy. Today, like athletes and Hollywood stars, many business leaders are household names. And, like movie and sports celebrities, many business leaders don’t know when it is time to get out. The smart ones realize that no one has a hot hand forever, so they get out while still at the top of their game. Instead of departing while he still looked indomitable, Gross clung to his fiefdom until dethroned by a coup d’état.
  3. Understand the true nature of power. If you have to hold onto power, you don’t really possess it. Gross wouldn’t relinquish his control of PIMCO because he never accepted the fact that his influence had long since evaporated. People who possess power have followers — even devotees — not detractors. To quote Game of Thrones author George R.R. Martin: “Power resides only where men believe it resides.”
  4. Read Shakespeare, don’t re-enact his tragedies. Gross had an opportunity to lead the young, to mentor them, to wow them with his sagacity. Instead he instigated a rebellion against his rule.

Having turned 70 years old and with billions of dollars in net worth salted away, Gross should have also learned to enjoy the finer things in life. It’s not too late, Mr. Gross. Be contemplative. Be meditative. Be philanthropic.

Don’t stick around until all those around you just want you to be gone.

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MikeCfinalwebMike Consol is editor of The Institutional Real Estate Letter – Americas.

Global wealth is growing

Are the very rich, as F. Scott Fitzgerald would have it, “different from you and me”? A new report from Credit Suisse takes a look at global household wealth and finds rising global wealth, but also rising inequality. The Global Wealth Report 2014 notes:

“The overall global economy may remain sluggish, but this has not prevented personal wealth from surging ahead during the past year. Driven by healthy housing markets and robust equity prices, total wealth grew by 8.3 percent worldwide to reach $263 trillion, the first time household wealth has passed the $250 trillion threshold.”

Household wealth, defined as “the value of financial assets plus real assets (principally housing) owned by households, less their debts,” has risen strongly since the global financial crisis, as markets and home values have recovered. But wealth inequality also appears to be rising, suggesting that many of the gains have been accrued by the wealthiest cohort.

One reason for the difference among low, middle and high wealth levels has to do with where household wealth is concentrated. The Credit Suisse report notes that, at lower wealth levels, the largest share of household wealth is held in savings accounts, while at middle wealth levels, the largest share of household wealth is the family home — and movements in home values have a big impact on the wealth of the middle. The highest wealth levels, however, have their wealth concentrated in businesses, whether private equity or listed shares, and the recent run-up in the stock market seems to have disproportionately affected the wealth of the very rich.

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LorettawebfinalLoretta Clodfelter is production and copy editor with Institutional Real Estate, Inc.

Knowledge is power

Being the editor of IREI’s Institutional Investing in Infrastructure publication affords a 30,000-foot view of the infrastructure investment world. Institutional infrastructure investing is, of course, a global endeavor — participants invest in toll roads in Australia, water projects in California, hospitals in Canada, airports in the United Kingdom, solar farms in Spain, natural gas pipelines in Norway and more. And in each of these markets are overlays of politics and public policy, regulatory decision making, and a host of other considerations unique to each market and each investment.

Another luxury of editing I3 is the perspective I get. I speak with, read from and listen to a lot of people from all sides of the market — a 360-degree view of the market.

Since IREI launched the I3 conference in 2006 and the I3 publication in 2008, it has been a crash course in global infrastructure investing, and it has been like drinking water from a fire hose. So when I was recently asked to give a 30- to 45-minute “Infrastructure 101” presentation to some of my colleagues at IREI headquarters in San Ramon, Calif., I thought: “piece of cake.”

However, I soon realized that a lot of what I now instinctively know about infrastructure investing is not at all easy to communicate. I wanted to fast-forward past the basics — the sectors, the countries, the investment products — and get into the here and now of what is going on in the market today and the trends that are driving it.

That would be impossible. Having typically been on the receiving end of such a presentation, thinking of how to explain what infrastructure investing is to colleagues, most of whom do not follow the goings-on of infrastructure on a daily basis, is a test and a chance for even greater understanding of the asset class.

I soon found myself remembering all those clichés I kept hearing again and again at our conferences from panelists over the years, “You have to crawl before you walk, and walk before you run.” Or, “we are in the first inning of a nine-inning game.”

Clichés are clichés for a reason — they can be pretty accurate, and now that I was on the other side of the panel, they made much more sense.

Not unlike many things, with infrastructure investing, you do have to know the basics before you can get a better understanding of the more complicated and nuanced aspects of the market.

Deciding what was relevant information and how to present it, while also trying to lessen the overwhelmed feeling I myself experienced when I was first learning about infrastructure investing, was an interesting and worthwhile exercise. In fact, I would suggest institutional investors assign this task to their staffs — have the infrastructure staff explain what infrastructure is to members of their investment committees or boards of trustees, or the staffs of other asset class teams related to infrastructure — real assets, commodities and private equity, for example.

And that is where I think many investors who started six to eight years ago have moved on to — they have a solid fundamental understanding of what infrastructure is and what it can do for their portfolios. They also have the confidence to forge ahead with investor clubs and consortiums that are driven by their interests.

The market has moved on to a new level — the investors who began infrastructure programs have progressed passed Infrastructure 101, and they are now taking the lead and creating a vision of the future infrastructure investing.

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DrewWebsiteDrew Campbell is senior editor of Institutional Investing in Infrastructure.

Have you ever watched a Harvard football game?

In 2004, a number of Yale students disguised themselves as the “Harvard Pep Squad” and handed out red and white cards at a Harvard-Yale football game that they claimed would read “Go Harvard” crowd-wide when held up. Unfortunately for Harvard students, when they held the cards up, they instead formed a pattern that read “We Suck”, much to the amusement of the opposing fans.

But I digress.

Last month, CalPERS announced that it would eliminate its $4 billion hedge fund program. While the program, at just over 1 percent of CalPERS’ total assets, was certainly not central to its portfolio, Bloomberg’s Erik Schatzker offered a telling analogy, or two, on Bloomberg TV as to the symbolic nature of the announcement:

“CalPERS giving up hedge funds is like Harvard giving up football. … Hedge funds aren’t core to CalPERS, only $4 billion of CalPERS’ roughly $300 billion of assets, and many people aren’t going to miss those hedge funds when they’re gone, but it has symbolic value that you can’t understate.

Imagine if Harvard were to give up football. CalPERS is the establishment in the pension fund business. It’s the largest public pension fund business in America and, as a result, it’s a pacesetter. It was among the first pension funds to invest in hedge funds more than a decade ago, and what’s happening now is that CalPERS is like the little child in the Hans Christian Andersen tale telling the emperor he isn’t wearing any clothes. Because the dirty little secret is that hedge funds don’t make pension funds very much money.”

And, in the case of CalPERS, they haven’t of late. CalPERS’ overall 18.4 percent return during the 2013–14 fiscal year far outpaced the 7.1 percent return it received from hedge funds. As did most of CalPERS other asset classes, including real assets, which returned 13.4 percent over the same period.

What’s more, according to the Bloomberg TV segment, CalPERS was charged $135 million in fees for the management of those assets — assets that, at a 7.1 percent return for the fiscal year, only made $284 million.

CalPERS certainly did not have harsh words for its hedge fund managers in the statement announcing the end to the program. But, those managers posting a 7.1 percent return in a year when CalPERS as a whole returned 18.4 percent, its public equity returned 24.8 percent and even its fixed income portfolio returned 8.3 percent, isn’t too far from holding up a big sign that reads … well, you get the picture.

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ReggieClodfelter91x119Reg Clodfelter is a reporter with Institutional Real Estate, Inc.

This could get messy

PandorasBoxHave English courts opened Pandora’s box? The U.K. High Court has ruled that Colliers International overvalued a German property in December 2005, and the servicer of the CMBS securitization that included the loan is due a refund (plus interest and fees).

Back in 2005, Colliers International appraisers valued a German property at €135 million. Based on that valuation, Credit Suisse provided an 80 percent loan (€110 million), which was then securitized and transferred to Titan to include in its €1 billion securitization offering. (Oh, those were the days!) Then the main tenant went bankrupt in the crash, the building lost 90 percent of its value, and Titan sued Colliers to recoup some of its losses. After five years, the courts have ruled that Colliers did indeed overvalue the building by 25 percent and owes €32 million plus interest and fees to the servicer.

There was no indication of criminal intent or nefarious doings — just an overly optimistic appraisal in a market that was bubbling up. The court ruled that this was negligent.

Hindsight is always 20/20. Looking back, it’s easy to see the property was overvalued. But looking forward in 2005? The sky was the limit. And no one forced Credit Suisse to provide an 80 percent loan. Nor did anyone twist Titan’s arm to roll the loan into a securitized pool. Presumably, investors also willingly bought a piece of the ever-expanding pie — until it wasn’t ever expanding.

I have to believe this ruling is going cause a tsunami of similar lawsuits now because all the buildings at that time were overvalued and overleveraged and then oversecuritized.

And I’m not the only one seeing more of these cases in the future. James Walton, a partner at Rosling King (the law firm that brought the suit against Colliers) was quoted as saying:

“This is the first time that a UK Court has been faced with a claim brought against a negligent property valuer where the loan advanced by the original lender has been securitized. As a result of this judgment, it is very likely we will see a greater appetite to recover losses suffered during the collapse of the commercial property market  across Europe during the recession. There is a perception that these claims may now be time-barred, but that perception is wrong.”

But when it comes to valuations, how much is art, and how much is science? If a firm is truly negligent, then yes, hang them from the yardarms. But where does negligence begin and a cloudy crystal ball end? Can appraisers be wrong, but not negligent? I would think so, but then again, I’m not a CMBS servicer holding useless loans. I might have a different viewpoint if I were.

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SheilaWebSheila Hopkins is managing director – Europe and infrastructure with Institutional Real Estate, Inc.

Something for the weekend?

Or somewhere? How about Tobago, in the Caribbean? As in Trinidad & Tobago. Sandy beaches, blue seas, sunny skies, golden sunsets (the sunrises might be golden, too, but we don’t get up for them), the occasional hurricane. Perfick, just perfick.

Tobago Beach debutesq real estate

A 300-acre estate has just become available on the northeast of the island and the owners, Anse Fourmi Beach Resorts Ltd., are proposing to construct a leisure resort that will feature accommodation for more than 360 guests, restaurants, cafés, bars, a spa and a fitness center, tennis courts, a swimming pool and a conference center. Plans also include a small marina complete with diving center and fishing boats.

Situated close to one of the world’s oldest protected national parks, the tropical estate has more than three miles of scenic coastline with sandy beaches and crystal-blue sheltered waters popular with divers exploring the many ancient shipwrecks lying there.

The authorities in Trinidad & Tobago, located 185 miles southwest of the popular island of Barbados and just off the coast of less popular Venezuela, have granted planning permission for development of the L’Anse Fourmi Estate as a luxury leisure resort. Tobago itself measures 30 miles end to end; it is regarded as the poor relation in the Trinidad & Tobago combo, and is relatively undiscovered.

The estate is one of the few remaining unspoiled properties in an area of outstanding natural beauty beneath the high ridge of a protected tropical rainforest. Extensive areas of flat land formerly used for cocoa planting lie behind the tree-lined beaches and these are regarded as ideal for construction of a luxury resort. The cocoa plantation was abandoned some 30 years ago.

As part of a strategic plan for tourism development, Tobago’s House of Assembly recently completed the final stage of a road network connecting the previously inaccessible beaches fronting the estate. So you won’t have to helicopter in, and ruin your green credentials.

According to Alexandra Hayward of Debutesq Group, marketing agents for the development, the owners of the site are prepared to consider a joint venture with suitable partners or an outright sale of the freehold interest in the estate plus the outline planning consent. Just $15 million, and it’s yours. One feature of the outright sale route would be that the purchase of 100 percent of the share capital could attract a tax rate of just 0.5 percent. That could be persuasive for some international investors, who will be used to more onerous tax regimes.

It’s almost the kind of place where you can imagine a real estate developer cum fund manager buying the site, building the resort and setting 10 rooms aside for use in client relations. I always thought that was an odd term, capable of misinterpretation. Client. Relations. Like I said, something and somewhere for the weekend.

The only question is, how do you get there? And back in time for that Monday morning meeting?

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RichardFlemingRichard Fleming is editor of The Institutional Real Estate Letter – Europe.