GLOBAL - Debt is the new investment buzzword but a warning has been sounded about the critical importance of performing thorough due diligence on real estate debt products.
Claude Angéloz, of Partners Group, told IPE Real Estate there are many such products in the market today which originate from the financial engineers of the investment banking industry but who do not have the necessary expertise to understand and manage the underlying real estate.
"Five to seven years down the road we expect to see a significant disparity between the performance of the best and least well performing managers," said Angéloz.
"The latter is likely to be managers without sufficient understanding of the asset class, taking primarily a financial engineering approach."
He continued: "We have seen 80 debt product offerings over the last 18 months and there is a significant disparity between the relevant expertise of the managers."
Angéloz said he believes for a good number of these products the source is the many financial engineers who need to readjust their business strategy in the market turmoil. "They need to make a living so have reinvented themselves," he said.
His message to investors is clear: "Do your due diligence on these investments. Don't rely solely on the Private Placement Memorandum (PPM). If you want to go into debt you need to understand the product and the underlying asset class yourself, or you need to seek expert advise to select the best managers."
Angéloz added that if a debt product offered by a financial engineer was successful it would quite likely be because of market timing.
"These providers will then claim that this "success" justifies a management fee of 1.5-2% in addition to a 15-20% performance fee and that they should therefore be remunerated in this way for their future debt product offerings," he said.