Fund terms and conditions within the private real estate industry have been a topic of dispute between fund managers and investors in recent years, with the volatile real estate investment market resulting in investors increasingly seeking more favourable terms. Preqin’s recent report Preqin Investor Outlook: Alternative Assets, H2 2013 examines the views of 450 investors in private real estate, infrastructure, private equity and hedge funds. Investors were asked whether they felt their interests were aligned with fund managers, whether they had seen any change in real estate fund terms and conditions and areas where this could be improved.
As attracting investor capital remains the key challenge for fund managers in a crowded and competitive market, it is vital for managers to take note of investors’ interests regarding fund terms, and to try to achieve the best possible value for the investor without compromising the successful running of the fund. In this regard, it is encouraging to note that the overwhelming majority of investors interviewed either agree or strongly agree that fund managers’ and investors’ interests are properly aligned (72%). This positive overall response from investors concerning the alignment of interests with fund managers may result from the fact that 30% of investors believe that there has been a significant or slight change in the alignment of interests in favour of the investor; conversely, only 10% of respondents have seen a change in favour of fund managers.
Nonetheless, over a quarter of investors (28%) strongly disagree that there is an alignment of interests between fund managers and investors, and 61% of investors have seen no change in fund terms in the last 12 months. These results indicate that either fund managers have been unwilling to make concessions for investors’ demands, or investors are not proactively pursuing changes to fund terms. The implications of this are that issues such as management fees, performance fees and hurdle rates are likely to remain a point of contention between these two parties until greater equilibrium of their respective interests is achieved.
Pressure to decrease fund management fees increased after the financial crisis, with investors keen for fees to cover the actual costs of fund management and expenses, without offering a significant source of profit for the fund manager. Investors appear to have seen positive changes in this regard, as when asked which area of fund terms they have seen the most change in the last 12 months, 71% of respondents stated management fees, with performance fees stated by a much lower 24% of investors. Comparatively, the hurdle rate was cited by only 14% of investors to have changed in the last 12 months, with increased transparency at fund level and a manager’s commitment to the fund also stated by 14% of respondents each.
Despite investors seeing signs of improvement regarding changes to management fees, this consistently remains the area of fund terms which investors are most dissatisfied with. The largest proportion of respondents stated management fees as a key area for improvement (41%). Performance fees were also a key issue for investors, with a notable 59% of respondents stating that the amount of fee charged and the structure utilized were areas for improvement collectively. Investors face multiple layers of fees in committing to a private real estate fund, which can often be discouraging when deciding whether to commit to a fund. To successfully attract investors to their fund, managers should aim not only to align their interests with the investors’ in this area, but also to provide transparent information on fees from the offset to avoid dissuading any investors from committing to their fund due to obscured information.