GLOBAL - The effectiveness of co-investment by real estate fund managers to align interests was seriously questioned at this year's IPE Real Estate Investor Forum & Awards, part of the IPD/IPE Real Estate Congress.
Ted Leary, president of Crosswater Realty Advisors, told delegates during the opening session in Amsterdam there was no evidence that co-investment made managers perform better, yet many investors continued to demand it.
The theme was picked up the following day, during IPE Real Estate's Global Investment Workshop, when Leary said co-investment was introduced by investment banks in the 1980s as a way of attracting institutional capital and it has endured in property investment ever since despite any evidence of effectiveness.
Leary, a former US investment manager with experience of the property downturn in the 1990s, came out of retirement during the recent financial crisis to set up Crosswater to advise investors on fund ‘workouts' and manager evaluation. He complained that co-investment "got into the water in the 80s and never got out", highlighting the fact that it was not common practice in other asset classes.
Greg MacKinnon, director of research at the Pension Real Estate Association (PREA) in the US, said investors wanted managers to "feel the pain" as well when their fund performance was negative. He also said co-investment should in theory align interests because both investors and managers were sharing "the same sources of return".
MacKinnon went on to propose that the real estate investment industry was ahead of other asset classes by employing co-investment, but Leary said the practice was more a vestige of the 1980s and a reflection on how the property sector was lacking "introspection" on the issue.
Leary said co-investment originated because there was a lack of trust from institutional investors in the real estate investment management industry.
He also found that co-investment could become a destructive factor in fund workouts, where managers were "desperately holding on to their stake" and consequently not acting in the interests of investors.
Leary also implied there was an inconsistency in the way managers were asked to co-invest while investments consultants - which help select managers and endorse strategies - were not.
Co-investment continues to be a popular practice among pension funds with Denmark's ATP one particular high profile champion of the practice.
IVG recently announced it would co-invest an equal amount of capital alongside four European pension funds in a new fund (see earlier IPE Real Estate article: Pension funds and IVG co-invest in green fund).
