Is like-mindedness a red herring for investors?
One of the clearest trends to emerge in recent years is investing alongside likeminded investors. For years, alignment of interest has equated to fund manager remuneration and co-investment - whether the interests of fellow investors in a fund were consistent was of limited concern.
However, lessons have been learned. Some investors defaulted on their capital calls, others sought to pull out of funds to the detriment of others. It became quickly apparent, in a number of cases, that interests were most certainly not aligned.
A recent survey by the Association of Real Estate Funds found that disagreements between investors were regarded as "more heated and intractable than disagreements between the investors and the fund manager".
This is one of the main rationales driving the popularity of joint ventures and so-called club deals, or club funds. The other is a greater desire for control among large investors dissatisfied with the performance and behaviour of fund managers (and their inability to exert any influence on this). It is the first line of thinking that needs questioning.
The fixation with like-mindedness is perhaps more responsible for the emergence of clubs than joint ventures. Club funds in many cases are structured in the same way as traditional funds, the only difference being the number of investors they contain. They might have tighter investment parameters and/or investor sign-off on individual investments, but they are not fundamentally distinct.
The rise of club funds can be explained simply as a product of investors' preference for like-mindedness, while fund managers would happily have welcomed a greater number of investors had the appetite been there.
One fund manager, who wishes to remain anonymous, told about how more than 20 institutional investors were close to signing up to what would have constituted a €1bn pan-European fund, but baulked at sitting alongside so many other investors.
Unfortunately, the strategy of the fund required this scale of investment, which would be impossible to replicate with far fewer partners, even if individual ticket sizes were increased.
It seems that in this case investors wanted the best of both worlds, but were unwilling to compromise over their concerns about investor alignment. This poses a real challenge for fund managers.
A Danish pension fund real estate port-folio manager said at MIPIM this year that
the institution was very much in the joint-venture/club-deal camp. The appeal of pooled funds, he believed, would not return soon. And he did not consider himself a large investor and disagreed that club deals were the preserve of the largest.
That said, he admitted it was impossible to guarantee like-mindedness among investors even though this is what he desired. What an investor wants today can be very different to what it will want in five years' time.
Strategies change, priorities shift, heads of real estate move on and trustees are replaced. For these reasons, is the risk associated with fellow investors actually one that it is possible to mitigate? Or is it simply a risk that must priced in - in other words, a necessary evil - comparable to, say, currency risk?
Are investors focusing on the wrong thing? Is like-mindedness a red herring?
According to Anthony Biddulph, who recently founded capital markets advisory firm Riverbridge Capital Partners, the focus on like-mindedness is a "complete fallacy" and the shunning of funds in favour of joint ventures and club deals is a "reactionary move by the industry and not thought through".
Rather than seeking to control alignment of interest between investors - which is impossible for the above reasons - Biddulph argues that investors should stick to concentrating on establishing an alignment of interest with the manager.