Pension funds are losing property talent to fund managers. But will pay promises be enough to keep them? Shayla Walmsley finds out
You cannot keep a good manager down - or at all, judging by the traffic of real estate managers between pension funds and investment managers over the past few years.
Some investment managers have been more aggressively acquisitive than others. Schroders, for instance, hired both Rob Bingen from ABP and Mark Wolters from MEAG. Likewise, some pension funds have suffered greater losses than others.
The Blue Sky Group, which manages the three KLM pension funds, with combined assets of €12.7bn, at the end of last year lost real estate fund manager Hidde Frequin to Goodman just five months after he replaced Raymond Satumalaij, who left to join Bouwfonds. Chief investment officer Fons Lute, who spent nine years at Blue Sky after working at the Dutch printers' pension scheme and Hoogovens pension scheme, himself recently left the scheme administrator.
The demand for personnel from pension funds arguably reflects the shift in power away from fund managers. How better to attract pension fund managers to a fund than to get defectors? These can be expected to know how pension fund managers think. Defecting pension fund managers offer a clear competitive advantage.
"Coming from that background, you can discuss the right issues with fund managers," says Guido Verhoef, who moved in June this year from investment manager Bouwfonds to PGGM, the €86bn pension administrator and asset manager of the Dutch pension fund for the care and welfare sector. "I can ask the right questions and discuss fees, for example, from the other side of the table. It's very smooth for the investment managers. We speak the same language, which is helpful. You can say to the investment manager ‘If we do it this way, we'll reach a solution more easily'. You understand it all from both sides."
Unlike pension funds, whose anxieties are more likely to be over liabilities than liquidity, fund managers are suffering acutely from the credit crunch, with competition rampant for capital injections into what might once have been seen as no-brainer funds. "Whether we can source deals depends on the broader financial market, and that's no fun at all," says Satumalaij. "Real estate spreads went from 25-50 basis points for residential to 100. One moment you could make a deal work for all partners, the next moment at least one of them wouldn't be able to get the financing."
The phenomenon of defection is not new; what is new is the scale - the steady trickle and potential professional haemorrhaging of real estate talent. As long as beleaguered fund managers believe there are pension funds willing to invest in their vehicles, given the right approach and the right incentives, they will have an incentive of their own to poach pension fund managers.
Yet Satumalaij believes there is still traction for capital extraction from real estate-oriented pension funds seeking out returns. "Pension funds are more cautious about investing and about switching from one asset class to another. But there are pension funds still increasing their allocation to real estate," he says. "It's a good moment for them to enter the market but I wonder if the inflows into real estate will continue. They could. If equities and bonds go down, real estate keeps its value or increases. "It's still happening. With traditional asset classes, the future returns outlook is diminishing. Pension funds - especially less well-funded pension funds - are still looking for returns."
In any case, it would be wrong to see the relationship as an unequal one between mendicants and benefactors. For all the relative power dynamics of the buy side and sell side, it is a mutual relationship, according to Verhoef. "Fund managers come to you, and you can give them proper feedback. If a manager is launching a vehicle, you have the opportunity to invest at an early stage, which makes it more interesting. You learn a lot from them what's happening in the market and, hopefully, they learn a lot from you."
Even so, some sense of how to reach potential investors is at a premium. "I'm focused on explaining how investors think to my colleagues. We want to focus on what investors need and there's a desire among fund managers to understand how they think," says Rodney Zimmerman, who joined AKRON as managing director for western Europe after heading real estate investment at the Dutch doctors' pension fund. "If you look at surveys, including INREV surveys, you see that investors and pension funds have different expectations from fund managers and different ways of thinking. There's a huge gap," he adds.
What investors are demanding above all, he argues, is to be kept in the loop. "The need for communication takes a lot of explaining," he says. "I'm trying to explain that if you have a way of thinking about, for example, exit strategies, you need to communicate it effectively and efficiently to pension funds.
"Fund managers tend to act, then afterwards to explain. Investors hate this approach because it leads to surprises. They can handle disappointment but they hate surprises. There's no trend towards consultation. Pension funds won't want to be involved in the decision-making but they do want to be informed."
It would be easy to stereotype the differences between investment and pension fund managers - the speed of decision-making, the hurry to close the deal, the obvious panoply of frustrations over speed and bureaucracy.
Verhoef points to what is arguably a distinction of large pension funds - their similarity to investment managers. "A large pension fund has capabilities," he says, pointing to his own expanded team.
The traffic in talent often involves managers from major pension funds, or from their independent or semi-independent investment arms. In some cases - notably ABP and PGGM - pension schemes have spun off their investment management as entities separate from administration. In fact, it is no coincidence that much of the traffic is to and from Dutch schemes, in a mature market facing regulatory changes that push towards fund management status. Yet if it's happening there first, it's likely to spread as pension schemes elsewhere mature.
"Large pension funds are more and more professional," says Verhoef. "There haven't been any surprises for me. You might think it would be less interesting and less dynamic. There are processes for investing and reporting guidelines but, other than those, there are no differences between being an investment manager and a pension fund manager."
The differences are of degree rather than kind. Governance, for instance, has crept up the list of priorities for pension fund managers. Verhoef describes it as being "closer to this type of information".
One reason for pension fund managers to switch sides, of course, is financial. Yet, even here remuneration for pension fund portfolio managers is beginning to look increasingly like that in fund management firms. A survey of 1,000 fund managers across asset classes by Godliman Partners earlier this year found that compensation had risen 10-20% between 2006 and 2007.
In this magazine, Andrew Livesey, managing director of Summit Search and Selection, recently estimated the average remuneration of a real estate fund manager at director level as between £120,000 and £150,000 (€188,000), with an additional 100%-200% in bonuses and benefits. He pointed out that the increase in recent years has narrowed the gap in pay between investment managers of real estate and other asset classes. It has also, arguably, narrowed the gap between investment and pension fund managers.
A recent ‘qualitative and quantitative' programme at ABP, for instance, focused on selective graduate recruitment aimed at lowering the average age, introducing new skills and upgrading existing employees. Remuneration since 2006 has depended on a performance and potential matrix (PPM). In 2007, the percentage of employees at the top of the pay scale was 9.1%; those in the next lowest grade 33.3%. The scheme spent €193m on salaries in 2007, up from €185m in 2006.
The problem for pension funds is that it is not just about money. Motivations to move are as varied as managers - but challenge ranks high for most. Satumalaij, for instance, had a seven-year itch after having joined Blue Sky at the start of a transition from direct to indirect real estate investment, with the opportunity to create new products.
"These are interesting times. Experiencing them from a fund manager's point of view is good for my learning curve," he says.
Often, fund managers poaching from pension funds are themselves in flux and the hiring of pension fund nous is part of their change programmes. For example, in June fund manager AKRON hired Zimmerman as managing director for western Europe as part of its expansion from its domestic Dutch market and an existing focus on central and eastern European markets.
"AKRON offered me the chance to set up a new organisation for western Europe, and opportunities like that don't come by every day," says Zimmerman, who previously spent six years at the doctors' pension fund and eight years at Interpolis/Achmea. "Now I'm doing a mixture of what I did at both," he says.
Scale is another attraction. Both Satumalaij and Verhoef speak of the advantages of managing larger teams dedicated to real estate, compared with smaller teams in pension funds with relatively small allocations to the asset class. "Pension funds are getting bigger and bigger, and more and more professional. PGGM is one of the largest, and it has become a very big real estate investor - initially as a direct investor, then in indirect. It was attractive to me to join that club," says Verhoef, citing as one of the scheme's chief attractions that it is an "innovative investor, and it was nice to move from the sell to the buy side".
If the shortage of talent is a problem in Europe, the problem is even more acute in Asia - because of relatively immature property funds markets in which most investment has previously been direct.
"I wouldn't be surprised to find it's the same elsewhere," says an investment bank real estate manager who last year struggled to hire in the nascent Chinese fund market. In these cases, one of the few options open to fund managers is to target potential defectors from more developed local securities markets.
"If we were still looking for people to assess unlisted property funds, we'd probably be looking at securities analysts. Often they'll come with experience of the market but it's still a different type of skill, despite the similarities. It's different analysing securities than reviewing private equity-style funds."
It is unsurprising, then, that there should be a premium on experienced asset management ‘returnees'. Richard Price, a former China country manager recently appointed by ING Real Estate as regional CEO, had an advantage in that he knew the region, and points to ambitious growth targets that he says are supported by the firm's international clients. "It helps a great deal if you can get up to speed quickly," he says. The problem will, if anything, become more acute. The China Investment Corporation, the country's sovereign wealth fund, has advertised for fund managers with overseas education and professional experience.
Getting up to speed is an industry, as well as an individual, priority. Earlier this year, the Asian Public Real Estate Association (APREA) launched a certification programme for Asian property investors. The programme covers investment structures and fund management, with input from overseas experts.
Even in developed markets, there just is not that much real estate talent around. PricewaterhouseCooper's ‘Global Real Estate' report, published in June 2008, noted: "Finally, across Europe there seems to be a decline in ‘quality human capital. A lack of skilled employees at all real estate levels often leaves management scrambling and many projects not as successful as projected."
As s long as fund management houses have deep pockets, and until pension funds offer managers the same chance to innovate that they can get in the private sector, the flow will continue.