Are we seeing a resurgence of the multi-manager/fund-of-funds model? Recent mandates suggest the maturing of a once nascent sector, according to Shayla Walsmley

Investors have been questioning the real estate funds model in recent years. What implications does this have for the fund of funds (FoF) vehicles and multi-managers whose own business models are predicated on the health of the underlying fund market? Both FoFs and multi-managers have come in for criticism themselves, not least due to the double layer of fees they generate.

A survey by KPMG at MIPIM at the beginning of March found none of the investors polled had investments in either - nor did they intend to invest in them over the next five years.

But these results were based on responses from large institutional investors, including sovereign wealth funds. There has also been some evidence to suggest that the multi-manager/FoF is beginning to experience a resurgence.

A spate of new mandates, combined with launches from Aberdeen and upcoming funds from Morgan Stanley and Composition Capital, suggest there is life in the old models yet.

Back in November, Bayerische Versorgungs-kammer (BVK), the €53bn multi-sector Bavarian pension scheme for self-employed professionals, awarded a fund-of-funds mandate to UBS with an initial capital commitment of €500m. The mandate covers value-added and opportunistic exposure to niche sub-sectors such as hotels, including in emerging markets, and development projects.

In fact, says Tilman Hickl, managing director at UBS Real Estate, BVK considered the multi-manager model but opted for a FoF on the basis that a niche strategy required a significant degree of local expertise.

"Granularity is easier to find in funds of funds," he says. "BVK considered a multi-manager but opted for best in class - not one manager for North America but one manager for nursing homes on the west coast of North America."

In contrast, John Gellatly, head of Europe multi-manager at Aviva Investors, says appetite for FoFs is strongest among smaller clients looking for diversification or bespoke strategies. "It's targeted," he says.

Meanwhile, the multi-manager is undergoing a renaissance of its own. An €85m pan-European multi-manager mandate from the Texas Employees' Retirement System is among Aberdeen's recent wins - a sign, according to Jon Lekander, global head of indirect property at Aberdeen Asset Management, that US investors are poised to capitalise on a European recovery. Aberdeen adds the Texas mandate to an existing $2bn (€1.5bn) multi-manager business.

According to Lekander, European investors in multi-manager funds tend to be learning the ropes with a view to eventually handling the investments themselves, but recognising that in Asian markets, for example, everything from the business culture to the macro-dynamics is different from European ones.

Another trend that seems to be emerging in the multi-manager and FoF sector is a move into non-fund investments. Composition Capital and Morgan Stanley are among the FoF managers raising vehicles.

Composition Capital, which is working on the launch of a third European FoF, has beefed up its internal staff over the past couple of years to exploit the potential offered by joint ventures and club deals. Morgan Stanley's FoF is understood to employ significant due diligence at the asset level, as well as the portfolio level, with detail and rigour the explicit differentiators.

What matters to investors is that the deals - whether they are new funds, funds on the secondary market, club deals or co-investments - give immediate exposure. "The key skill is the ability to underwrite not just the funds but the assets in those funds. It's a more demanding, higher-value offering," agrees Jeremy Plummer, head of global multi-manager at CBRE Global Investors.

Aberdeen is another FoF manager that has expanded beyond investing in traditional funds to clubs, joint ventures, secondaries and hybrid capital projects.

In April it announced the first closing of its third Asia-Pacific FoF, with $242m (€184.4m) raised over a nine-month period and an additional $230m in co-investment capital from some of the investors in the fund for exposure to the underlying structures.

Describing this additional capital as "a side-pocket of cash", senior investment specialist Chris van Beek said the opportunity to co-invest most often attracted investors familiar with the region who had done their homework.

This will not be the first time Aberdeen has stretched the structure beyond investment in specialist funds. For one of its earlier Asian FoFs, it formed its own Japanese residential joint venture with GE Capital after failing to find an existing vehicle with a strategy it deemed to be appropriate.

The trend towards investing in multiple underlying structures is no less apparent in multi-managers. "As the market has moved, multi-managers have adapted the business model accordingly," says Plummer.

"We're capital aggregators and we have access to the best private investment available - whether that's core investments, club deals or joint ventures.

"The question is how to resource it. It's management intensive and most investors don't have the resources to do it. At the same time, investors don't want to go through the old funds of funds to get to a club deal, but they will come to fund managers on a separate account basis for that kind of investment."

Yet Gellatly believes the alleged loss of investor appetite for pooled funds, in contrast to joint ventures and club deals, has been media-hyped beyond any distinction.

"Nobody has yet explained to me when a joint venture becomes a club deal, nor when that becomes a pooled fund," he says.

"You see sovereign wealth funds going down the joint venture and club route, but to say the pooled fund model is dead is an exaggeration. If anything, the trend is going the other way. -Bigger pension funds want to go global with additional elements such as liquidity or FX, and they don't have the resources to do it themselves."

In any case, Gellatly says, smaller investors will pari passu invest in pooled fund-of-funds vehicles with pre-specified deals, amid an overall increase in demands for pre-specification of assets.

With an open-ended global fund of funds, investors want to know what assets are in the fund "so they can see what they're buying into", but the focus on pre-specified assets requires more due diligence effort from the fund manager.

"That means you are lining up deals without knowing you've got the capital for the fund," Gellatly says.

Confusion between multi-managers and FoFs persists because they both comprise portfolios of generally unlisted positions. But arguably it no longer makes sense to observe such a sharp distinction between one type of vehicle and another.

If a fund is to invest in the whole range - joint ventures, clubs, co-investment - it is difficult to maintain a distinction between that model and the Townsend Group's $1.3bn special situation mandates investing via precisely the same structures.

Speaking on condition of anonymity, a real estate head at a sizeable fund management house claims there is "very little fund of funds can add". He says: "The fund of funds concept has been sold to investors without a large team to do their own on-site due diligence. But the challenge FoF managers have now is that even investors' small teams can get access to funds, and get funds to come to them. The effect is that fees are coming under pressure."

According to an INREV survey published in November 2011, investors looking to bring down overall FoF fees were targeting management rather than (aligned) performance fees. Around 40% of the FoFs studied charged different management fees during and after the commitment period.

Yet fees do not come up as a topic as often as they used to - at least not among FoF managers. Investors are willing to pay them, according to the private equity fund manager - but they want to see what they are getting for it.

Plummer contrasts the FoF model with the kind of structure set up by Blackstone with its operating partner - and a double fee load. "To be frank, the sum of the fees is lower than in the opportunistic fund model," he says. "It's a similar value model, but with lower fees."

Given the definition shifts - and the fees - the modesty of the claims made for multi-manager funds as a category is perhaps surprising. Lekander points to multi-manager as a subset of an alternative to currently unyielding bonds.

"Multi-manager will always be cyclical," he says. "Property appears more attractive than bonds and less volatile than equities. Property is, in fact, volatile but the volatility has increased to the same extent [as in equity markets]."

He adds: "A viable global strategy will be indirect, where the investor has the in-house capability, and will be supplemented by multi-manager investment. It should be viewed as an add-on, a supplement. It's not an exclusive mechanism."

Hickl agrees. When BVK opted for the FoF option, it was a question, he says, of "what would you give as a present to someone who has everything?".

"I'd love to tell you there is a huge trend but you have to be really big to go for it. It offers a high degree of diversification but it's not a market trend that everyone will follow. There is a market but it would be an exaggeration to say the FoF model will dominate."