What do fund manager CFO/COOs need to provide for investors to ensure that their information needs are met? Martin Hurst reports
This was the theme of INREV's inaugural CFO/COO conference, held in Berlin in September. The event saw the launch of INREV's guidelines on the disclosure of fee structures for private institutional property funds. These guidelines have the aim of increasing transparency for investors in Europe's €400bn non-listed real estate funds industry seeking to compare managers and fund structures during the selection process.
One delegate at the conference commented that this will also drive performance given that the question as to whether the fees charged are also justified will come in for greater scrutiny. The conference also saw the launch of the new calculation methodology for the presentation of net asset value (NAV) which aims to enable investors to compare the performance and valuation of funds for the first time.
Conference speakers included Rob Kochis, principal at US-based real estate investment consultancy Townsend Group, who spoke of the proliferation of new managers as real estate has boomed and of the challenge of directing investors to best in class which has grown as a result. He said that as the asset class has grown in complexity so the NCREIF index has become insufficient for modern investment purposes, being exclusively US-focused, core, property level only (as opposed to fund level), too limited in terms of property types and the frequency of appraisal. "Investors demand more dynamic information. We will work with NCREIF to clean up the data and make it presentable," Kochis said.
He noted that the challenges involved in producing an index include the 60-90 day time lag for valuations, which is too long, and valuation practices that are still too varied. "There are accounting discrepancies in terms of how operating income is recorded," he said. Kochis concluded that real estate has become mainstream and has a dynamism that "both empowers and burdens investors". Increased appetite for the asset class coincides with a variety of opportunities but investors are burdened because they have to become informed about these opportunities. Addressing managers, he said: "The current information demands are at their highest so your co-operation is critical."
Responding to the question ‘Would the current uncertainties derail investor interest in the asset class?' Kochis said: "None of us expects a crash to destroy the asset class. Things will soon return to normal in terms of the amount of capital investors are willing to commit."
Angela Crawford-Ingle, senior partner at PriceWaterhouse Coopers and co-chair of INREV's reporting committee, chaired a panel which posed the question ‘What do investors want and how can CFOs/COOs deliver?'Panelist Allen Mikkelsen of Danish supplementary labour fund ATP spoke of the difficulties he experiences with valuations because the information he receives from the various fund managers is delivered in different formats and at different times. "We need comparability," he said. "CFOs may think we throw the information in the bin, but we do use it. ATP has to report in accordance with IFRS, so as soon as we receive information based on mark to market valuations the better. The more the valuation and returns data is comparable between funds the more we can make daily comparisons and decide who is the good manager. So I am very much in favour of INREV's NAV initiative because its purpose is to deliver transparency for investors. The man to provide this is the man with the best information, which is the CFO/COO. Our role as an investor is to ensure that the accounting practices and valuation methodologies used are consistent and transparent."
Andy Fish, senior vice president at GIC Real Estate, agreed: "It is very important to attain consistency. The disparity between reporting is incredible - some is at cost and some is at market value. Comparable and timely data would make my life so much easier. We recently refused to follow on with the fund of a reputable manager because of the quality of reporting."
Peter Cluff, co-founder of Europa Capital, presented the supply-side view: "Most managers would say that we want to produce the information in a way that investors need it because we need the investors' goodwill. But we have different investor clients around the world with different information requirements. It is very challenging to produce all this information for all investors within a time frame. The standard will be useful but we will still always find that there will be investors who want something extra." Mikkelsen stressed that it will pay off for managers who contribute to a standard process - "think how much time you will save", he said.
Referring to the need for market information, Andy Fish said that "investors have a responsibility not to make managers make comparisons with indices that are meaningless". Cluff noted that some indices are not meaningful because the samples on which they are based are too small.
Mikkelsen stressed that in the due diligence which ATP carries out it is very important to have easy access to the documents behind the investment. "There must be good procedures and internal control - it is not just the auditors that want that," he said. Fish echoed the sentiment, saying that "we spend as much time on the manager due diligence as we do looking at the real estate". Cluff said: "It is in all our interests to find the most painless way of providing for investors' reporting requirements." In his presentation entitled ‘Peformance benchmarking - time to take it seriously' Ian Gleeson, head of multi-manager at Morley Fund Management, said that "choosing the right benchmark may be the single most important decision in the life of a portfolio". He noted that less than 36.2% of managers contribute data, which he attributed to "disclosure issues, inertia and a lack of peer pressure". A lack of reliable benchmarking has some adverse consequences, including the tendency for investors to have unsuitable benchmarks thrust upon them; they then take suboptimal investment decisions, managers struggle to attract capital and remuneration structures are not as efficient as they could be and asset allocators struggle to think of property in a multi-asset context.
The investor community needs a reliable index measuring the performance of private property vehicles across the three principal regions of Europe, North America and Asia. It needs to be capable of providing sub-indices but does not need a high degree of granularity. The focus should be on a fund level and not an individual asset level. He said that there is no need for quarterly performance data; we can start with good annual data. Finally, we must guarantee anonymity for managers to encourage data provision.
Feedback from breakout sessions: Gleeson said that investors don't underwrite the operational side of the risk management process and as such may need education in this area. Peter Cluff said that the INREV benchmark may be over-inflated because only the better performing managers will submit data. Jef Holland voiced concern about the valuations of some opportunistic funds.