Shayla Walmsley explores how pension funds might use small print to skew deals their way.

What looked at first like a straightforward fund investment turned out to be the mother of all contracts, complete with multiple caveats, opt-ins and get-outs. The recommendation document presented to the Oregon Investment Council (OIC) this week for a "strategic partnership" between the $59bn (€41.6bn) Oregon Public Employees Retirement Fund (OPERF) and ProLogis opened with an investment no more exotic than a $75m capital injection in the logistics firm's European Logistics Fund.

But that's just the start. Under the terms of the deal provisionally approved this week, OPERF will channel investment into ProLogis logistics funds, joint ventures and equity via a feeder vehicle set up for the purpose. The cautious language - "may", "subject to", "potential" and "anticipated" - reflects the pension scheme's caution about signing up for a long-term commitment to what is, after all, a new structure. "Every negotiation is different," says OPERF spokesman James Sinks. "You can't say this particular deal, especially with its creative structure, is a model for OPERF future deals."

If the caution is understandable, the willingness to sign up for five years (with most investment likely in the first three) is less so. Given the amount of capital OPERF is willing to invest, it would likely have first refusal on upcoming opportunities in any case. So why commit for the long haul? "Better fees," says Sinks.

Which takes you to the heart of the deal. Two things are clear from the document presented to the OIC.

The first is a concern over control. It agreement commits OPERF to little except the provision of capital. While ProLogis will offer the pension scheme future co-investment and joint venture opportunities across vehicles and categories, with a focus on value-add, OPERF "may notify ProLogis whether and to what extent it desires to invest [and] will reserve the right to decline an opportunity for investment".

It isn't just large US public pension schemes that are concerned about being locked into property investments they can't properly control. Robert Stolfo, director of business development at Invesco Real Estate, points out that German investors tend to prefer vehicles they can manage, such as clubs, to large, anonymous funds, which they can't. "They tend to like more control over illiquid investments they can't get rid of easily or quickly," he says. "There is a stronger need for control over investment decisions because they can't exit those decisions easily. With bonds are equities, they can press a button and get out of them."

What drives this tendency in part, he says, is the fact institutional investment decision-makers often come out of the real estate industry rather than finance.  Although it's not necessarily a bad thing, from a financial management perspective, it demands significant skill sets. "There's more work from the management side and a bit more sensitivity about pulling together investors," says Stolfo.

The second priority exhibited by the OPERF recommendation document is that fees matter. Of the seven-point rationale laid out by the pension scheme for the investment - including global 'most favoured nation' rights, relatively low-risk access to emerging markets and opportunities for co-investment - number one is the management fee rebates on invested capital.

Driving down fees amounts to a general principle. "Yes, fees have been a focus for the Oregon Investment Council, which believes strongly that interests should be aligned when it comes to the fee structure," says Sinks. "Again, every deal is different, so there is no stock answer when it comes to fees, but the OIC is keenly interested in ensuring Oregon has the best possible terms in every investment that is made, and it's not uncommon for the OIC to make a commitment contingent on fee reductions."

Arguably, that's simply what a buyers' market looks like. "It's quite simple, really," says Deborah Lloyd, corporate real estate partner at law firm Nabarro. "It's about market forces. Fund managers are still desperate to raise equity. If investors want to commit large amounts of it, fund managers will bend over backward to accommodate them. Some managers are getting more in line with better corporate governance, lower fees - in short, doing whatever investors want them to."

Nor is it exclusively a luxury for pension schemes with - as in this case -$500m to spend. Lloyd points to the positive knock-on effect on smaller investors. Fee negotiations successfully conducted by one large investor tend to apply to all investors in a fund, for example. "If investors see one investor getting preferential fee terms, most want the same fee deal - even if they're smaller investors," she says.

"Four or five years ago, when you were doing due diligence for a client, fund managers were reluctant to tell you what special deals they'd agreed with other investors. Nowadays, they're much more transparent - mostly because investors won't commit capital unless they know what everyone else got."