Transparency in unlisted real estate funds has improved in recent  years. But Volker Wiederrich questions whether, even in today's difficult investing environment, it has reached a level that meets investors' requirements


Volker Wiederrich is CIO at Swisslake

In recent months it has become evident that the current global crisis is not limited to a specific market or sector. In addition to the banking and hedge fund victims, the real estate private equity industry has also been significantly affected. The re-evaluation of risk is a necessary reaction to the economic storm we are witnessing in the markets today.

In a world where statistical normal distributions are absolutely unreliable and outlier events are daily news, the importance of providing reliable information is paramount. There is added pressure on every company to increase the information provided and the level of transparency therein.

Not surprisingly in an opaque industry such as real estate private equity, fund managers are encountering a greater number of requests for more  transparency in their reports and during investors' investment due diligence. This raises the question: what is the actual state of play with respect to transparency and real estate private equity?

There are 890 real estate private equity fund managers listed in our database, of which 330 are launching European real estate fund vehicles. The information provided by managers for the investor's due diligence and continuous investment management varies significantly, not only in depth but also in quality.

On the whole, fund managers are reluctant to disclose detailed property information on an ongoing basis, including underwriting models for acquisitions that allow future comparison of actual versus expected performance, adjusted net asset values, details of financing, details of lease terms and financial instruments, or to issue ad-hoc reports in case of unusual events.

Further, very rarely will fund documentation include sensitivity analysis and fund-specific risk considerations. In addition, one phenomenon continues to persist in the industry: fund managers remain very reluctant to disclose to an investor the identity of other investors in the same fund, thereby generating a potential or additional counterparty risk for the investor.

However, even if each fund provides detailed information, investors still face challenges with the comparability of information from different funds. A comparison of apples with oranges is complicating investors' due diligence. Organisations such as INREV have to be credited for the standardisation of fund information to be provided by managers. Unfortunately, compared with the total number of fund managers in the market, only a portion of fund managers have adopted standardised methods in full.

Accordingly, comparability continues to remain an issue for the time being.
Given the current financial and economic crisis real estate private equity fund managers face, transparency is not only an issue of willingness to disclose information but also an issue of capacity. Reporting is rarely considered a core function of a fund - this holds especially for smaller sized fund managers.

Fund managers, like numerous financial and non-financial companies, are not exempt from the economic downturn; we have seen fund managers reducing staff, shutting offices, increasing response times to requests from investors and providing less transparency than before. Needless to say, uncertainty is being generated on the investor side, which can be expensive, no matter how well the fund manager performs.

Despite the financial crisis, transparency needs to remain and improve going forward. We believe transparency will improve substantially over the coming years, not just because there is a financial crisis and negative performance of funds, but through investor awareness of the inherent risks associated with non-transparent private equity and globalisation and the increasing complexity of private equity real estate fund investments.

In addition, the evolving secondary market for real estate private
equity fund interests will require a continuous reporting of the funds with a high level of transparency in order to make this market more efficient. The importance of transparency should also become a key focus for fund managers.

It is a major selling point to investors to know fund managers value their investor relationships, and it should provide an important function within a fund's corporate profile. Nonetheless, the industry has made progress in providing investors with sufficient information to conduct their due diligence and make informed investment decisions.

This is evident in the willingness of some managers to provide information, improve investor relations and accept that without transparency they are jeopardising the ongoing relationship with their investors. That said, even in these troubled times there is still some way to go before investors will feel completely satisfied with the level of transparency afforded to them.