6th October 2017
Over the years many investors have declared a need to invest in a combination of established managers and a selection of new niche managers; the theory being that established managers offer stability and diversity and newer managers offer access to specialist areas of real estate and energy to generate better returns.
In the ten years since the last downturn there has been wave upon wave of regulation and supervision. Larger managers have embraced this while smaller managers have often opted to sidestep it and remain focused on deal-by-deal activity, teaming up with investors or the large managers to deploy capital in these niche areas.
Many of the larger fund managers have become institutions in their own right with the manpower to embrace the myriad reporting and regulation that the various bodies devise. This has made them more attractive as sources of capital for LPs. The landscape for smaller managers trying to raise money for discretionary investing has been bleaker with only a handful of success stories.
However, over the past year or so we have observed the re-emergence of first-time managers. These have come from niche real estate businesses, which have built up a track record executing deal-by-deal strategies or individuals spinning out of the larger and in some cases overly institutional managers. Fundraising still isn’t easy, however, and the levels of due diligence on new managers is high.
The main issue is that the work required to get a manager’s operational infrastructure and reporting over the line falls to a small handful of people or, indeed, on one person. Langham Hall has been involved with this process for a number of funds and it is clear that there is no obvious place to go for guidance on how to comply with the various regulations.
Some industry bodies try to help. INREV is probably the closest in providing guidance. It also tries to standardise the due diligence processes and reporting guidelines, but organisations such as the US-based ILPA muddy the waters by influencing US LPs to demand information which is already disclosed in existing reporting. The problem for UK managers is there is an alphabet soup of organisations which look to provide guidance in one shape or form including IPD, IPF, INREV, ULI, AREF, BPF and BVCA.
We strongly believe this was one of the reasons the UK real estate funds industry was so far behind other alternative assets in lobbying Europe on the AIFMD Directive and we are seeing a repeat of this in response to Brexit. In private equity the BVCA benefits from being the sole UK representative.
Langham Hall executives sit on the committees for several of the above organisations and we are aware that committees frequently consist of large institutional LPs and representatives from the largest fund managers. It does mean that some of the issues with reporting and regulation compliance for smaller managers never make the table. We have been at meetings where guidelines are tweaked with a view to improvement, but an auditor must resist the temptation to sign off on the idea of increasing its scope of services or a large fund manager must not to put up barriers to the next generation of managers.
Although we haven’t seen any overt evidence of this, we have often been a lone voice asking how our clients will be able to comply. The new breed of fund managers are mostly all high calibre organisations who see the benefit of making it easy for LPs to tick the box on due diligence. However, we regularly field questions such as “how do we comply with...”, “how much work do we really need to do on...”, “what are LPs expecting to see?”
The emerging managers will continue to plough through the due diligence and will transition from deal maker to fund manager, but it would be nice to think that industry bodies fully recognise the need to promote the next generation of managers, not least because they may have different and innovative ideas to older managers. In practical terms this means industry bodies should initially engage with some of these smaller groups to understand some of the difficulties they faced launching new businesses.