From the ashes of the downturn a range of new boutique real estate managers is emerging. Although there is a variety of new flavours on offer - both in terms of strategy and structure - track record, the covenant and alignment are all important, as Christine Senior reports

A number of real estate specialists are on the move and looking to establish new ventures. The industry shake-out means many seasoned professionals have been forced to leave their existing posts, through reorganisations and retrenchment, as financial institutions have had to downsize, pulling out of more peripheral activities to concentrate on their core competencies. In other cases managers have felt constrained in working for a big institution and are keen to strike out on their own. The crisis has precipitated moves that were being considered beforehand.

Business models differ among the new fund managers, but they occupy a niche where they can bring the benefits of their specialist knowledge and experience. Sometimes that niche is very specialist indeed.

ThreadGreen Partners, for example, launched in 2007, focuses on sale and leaseback of properties to businesses in Europe. Because of the nature of the business, the standing of the tenants, their long-term viability over perhaps 30 or 40 years - inasmuch as it is possible to judge that - is as important, if not more important, than the quality of the buildings themselves.

"We look for extremely long leases with companies that we understand in detail," says managing partner Alistair Calvert. "We don't just have a quick glance at an S&P report or run through the P&L statement. We get to know most things about a business before we move forward on a transaction."

The fund's aim is to provide high cash flow, inflation-indexed investment. Investors in ThreadGreen's current fund are mainly US institutions and funds of funds. A second fund set to be launched by the end of the year should attract European long-term investors such as pension funds and insurance companies, says Calvert.

Ric Lewis still considers himself a boutique manager although he runs AEW's two opportunistic European funds, EPISO and EPI, which are jointly worth over €2bn, as part of his new boutique venture, Tristan Capital Partners, launched in 2009. Lewis also has plans to go back to the kind of things he was doing in a previous role at Curzon Partners, running two series of value added and core plus funds. A European core plus product will be launched first in the fourth quarter of this year.

Core plus offers the greatest opportunities at this point in the economic cycle, according to Lewis, where economic activity is gradually picking up.

"What people are willing to pay for core plus risk is very different from what they are willing to pay for core risk and that makes for great opportunities for core plus funds," he says. "That is really the theme or the opportunity that is starting to emerge and will emerge over the next 12 to 24 months in a normalising growing economy, even if it's growing slowly."

Almacantar, launched last October by Neil Jones and Mike Hussey, had its first closing in April, raising €150m. Both Jones and Hussey have built reputations in the real estate business - Jones was formerly chief executive of Grosvenor, continental Europe, and Hussey managing director of the London portfolio of Land Securities.

The new venture will focus on property in central London and central Paris. "We don't need to be in both markets. Having that geographical scope means we can select where we believe there is best value," says Jones.

"The opportunities we see over the next few years are for those management teams that have the skills to take secondary quality income and improve it through the repositioning of assets," he adds. "It might be through renovations, redevelopments or reorganising the leases. To be able to do that requires a very strong understanding of the occupier market, the issues tenants are facing, and being able to solve those for the occupier. By doing that one improves the quality of the income and creates value."

Jos Short and Andrew Thornton, founders of Internos, which launched in May 2008, found themselves taking a different route than they originally envisaged when they first went into partnership. Short was previously running opportunistic strategies at Pramerica, while Thornton was COO in Europe for Invesco's real estate business, which focused on core and value added investment.

The original plan had been to set up a fund from scratch using their skills, but the collapse of Lehman changed all that. Investors were unwilling to take on new commitments, so when the opportunity arose to buy the Halverton real estate investment management business from GPT, Short and Thornton took it. They took over the five funds and two portfolios focusing mainly on Dutch and German retail, office and light industrial property which they now manage.

When the time is right, Internos will be adding to its fund range. "We need to raise new funds to build our business and we are likely to do that in those low risk areas where we already have expertise," says Thornton, declining to be more specific.

All these new ventures have managers have with solid reputations and proven business success. Investors need the comfort of entrusting money to tried and tested managers. The driving factor behind a decision to invest is that a new manager must have a believable story, must convince investors he can add value to a portfolio. The evidence of this is the manager's track record.

Track record is all important, says Tommy Brown, principal and co-founder of real estate investment manager Clerestory Capital Partners. "The real estate world is changing but at a slower rate than everyone expected. You are probably not going to garner capital from investors unless you are a tried industry veteran, like Ric Lewis, Mike Hussey or Neil Jones. You are also unlikely to raise capital from institutional investors unless you can connect the dots with the institutional world by having been an operating partner for a pension fund separate account, or having worked for a private equity fund or institution."

Lewis too sets great store by managers being able to demonstrate their achievements.
"Over the next few years there is going to be less capital and there are going to be fewer people getting that capital," Lewis says. "The capital is going to go to the people who kept their promises, did well economically, kept in touch with clients, kept their integrity and look like they're poised to do well again, because they have an idea, a product or strategy that is based in fundamentals and conviction and ability."

Thornton says investors are not going to invest in a fund if they do not think it will achieve critical mass to go forward. "There is a need to build confidence and momentum in new fund launches, and to build around some cornerstone investors you have worked with in the past. That allows you to talk to other investors, and because they know this is a fund that is going to happen, it becomes self-fulfilling. A lot is based on relationships - people will work with people they trust and like. If you made money for people in the past or looked after people well they are going to be minded to go with you when they are deploying new capital."

Another important issue to investors considering investing with a new boutique is alignment of interests between themselves and the manager, says Kirstin Irvine, European real estate researcher at Mercer.

"Financing is really important in a boutique, particularly if the staff are structured in an equity participation scheme, or have a holding in the company in some way. It is important to understand how that is tied to the individual fund, how each of the individuals is compensated, if they are aligned with investors. What is motivating them? Is it asset gathering which is not necessarily beneficial for the majority of clients."

The Almacantar model is one where the investors are shareholders in the fund. Compared with the externally managed investment vehicle, Jones and Hussey feel that there are several advantages of the internally managed corporation, in terms of alignment and governance. Management, in terms of expertise/talent, is exclusive to the vehicle and fully dedicated to implementing its business plan; shareholders participate in both returns on assets as well as any business value created; there are no fee arrangements between investors and management - by definition, shareholders fund the overhead of the business. On the subject of governance, key decisions in terms of budget, investment strategy, acquisitions and sales etc, are the remit of the board of directors, upon which both management and investors are represented, with investors holding the majority of seats.

If alignment of interests between managers and investors has taken on a new importance for investors over the past few months, so has alignment among the investors themselves. Different types of investors have different priorities. Having the same goals is regarded as vital: multi-managers have different concerns from pension funds, for example.

"A multi-manager fund needs to have regard to the dynamics of their own investors," says Jones. "What I prefer to call proprietary capital - it might be a pension fund, or high net worth investor, private organisation - they tend to be more open ended. They may decide it's more beneficial to carry on with investment in vehicles because of the market cycle. A multi-manager or fund of funds might be constrained by the life of their own vehicle. They have much less flexibility in terms of what they do next."

Hewitt's concerns about boutique managers, according to consultant Richard Cooper, would be around the covenant of the business. Over the last couple of years European sector specialists have been suffering, he says. "Fee income has gone down. If they were relying on a performance kicker, that hasn't come through. Broadly these funds are all geared so they really struggled. If we were going to invest with a boutique manager we'd be very concerned about the covenant of the manager, how strong they are and the strength of the fee income, how scaleable the business is, how successful they are going to be."

Other issues that investors should be concerned about are the nuts and bolts of the running of the business, which are part of any newly established business, says Irvine. What might be considered more peripheral issues of infrastructure can be overlooked.
"If their computer system breaks down, do they have someone who can fix it, or HR issues - are employment contracts well drafted?" she says. "Office space is another. Do they have somewhere out of which they are able to function? Sometimes those very obvious questions can be overlooked because you are looking at the detail."

There is still much uncertainty: one factor driving the growth of new specialist boutiques is where large conglomerates, such as investment banks, have sold off non-core activities to focus on core. One of these is Lothbury Investment Management, whose launch is the product of a management buyout from Belgian group KBC Asset Management. Lothbury continues to manage property unit trusts including Lothbury Property Trust, and the European Property Fund which between them cover the UK and European property markets.

"I would say many large investment banks now have to get rid of their boutiques, so some of the boutiques that come to the market will come from large investment banks, such as the KBC one," says Jan Meulenbelt, global head of ING Real Estate Select. "The interesting question is: can these boutiques survive without the research knowledge of the larger firm?"

The investment world is still in such a state of flux that conditions are still not settled enough to make the future landscape clear. This is hardly the most favourable climate for setting up a new venture. The effect of the proposed Volcker rule in the US is still an unknown, and banks are still deciding the future of their real estate platforms. With such a background, it is not surprising that new managers are so few.

Brown has some doubts about the viability of many potential boutique managers: "Clearly new boutiques will appear but the bar is going to be much, much higher to get to a first close. In order to break into the Premier League you are going to have a larger minimum for first close, greater scrutiny of the management company and finances, and greater scrutiny of the team and their background. There is a lot of talk of new strategies, everybody is trying to raise a new fund but whether or not they will be successful is a different question."