Partnership. The word is nearly ubiquitous in the property world. Anyone who has ever invested in a real estate fund is likely a partner in a partnership. But in the aftermath of the GFC and the losses suffered by many such funds, some investors find themselves feeling that the word partner has been sorely used by fund sponsors. For smaller investors, funds and similar commingled vehicles remain the best, if imperfect, means to gain exposure to diversified, professionally managed, commercial property. For larger investors, however, disappointing performance coupled with lingering suspicions of misaligned incentives between limited and general partners has led to a search to redefine partnership in a way that better meets their definition of this oft-abused term.
Of course, investors have been participating in direct relationships with developers and sponsors since the dawn of the property industry. And such partnerships have allowed both capital and sponsor to best tailor partnership terms and structure to meet the specific needs of both parties. Ironically, however, larger investors, who are most vocal in seeking new forms of partnerships and clubs, are also often the most poorly equipped in terms of staffing and resources to construct such bespoke arrangements. For capital and sponsor alike, the very features that permit tailoring a two-party relationship also make the process of hand-crafting the terms that govern that partnership an often painful and expensive enterprise.
This leaves many larger pensions, sovereigns and endowments in a quandary: Maximize efficiency and invest in funds, with the loss of focus and control that they entail; or hand-craft partnerships, deal-by-deal, and struggle to deploy capital in a way that is cost- and time-effective. On the horns of this dilemma, some are now forging a third pathway, creating programmatic partnerships that allow both capital providers and sponsors, having gone through the brain damage of constructing a tailored partnership solution, to replicate this effort by deploying capital across a series of properties or investments having similar characteristics that can be specified in advance.
While opportunity funds have been using this device for many years, only recently have institutional investors, led by the larger funds and insurance companies, realized that they too can identify operational sponsors with deep capabilities in targeted product and regional verticals to create proprietary access to highly focused investment opportunities. We expect to see an increasing number of capable sponsors and sophisticated investors venture into these waters as both seek a more lasting and ongoing relationship. The perfect partnership.
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Russell Platt is a managing director and CEO of Forum Partners. He is a member of the advisory board of the VIP – Europe conference.
