GLOBAL - Smaller European pension funds are finding themselves marginalised by property fund managers tired of their requests for special terms, according to a US fund-of-funds manager.

Joanne Douvas, principal of Clerestory, told IPE Real Estate small investors, such as pension funds and aggregators, exploit their willingness to commit capital early to demand unfair investment advantages.

"Otherwise, they wouldn't have the size or the prestige to do it," said Douvas.

She declined to identify the culprits, but added "they know who they are".

The problem for many fund managers is they face increasing competition for capital as pension funds sit out the credit crisis. Large pension funds with available capital are either opting aggressively for direct investment or are looking to commit more capital than fund managers want from a single investor.

"Right now, with tough economic news, a decline in equities and the US causing a denominator problem, it's tougher for anyone to raise capital," said Douvas.

"If there is attrition, it won't be driven by fund managers but by the availability of capital. Many investors won't step up to new funds."

She continued: "The really big pension funds are moving away from investing in funds and trying to go direct - look at sovereign funds and the Canadians. They have a size issue. If you've got $400m to put in a fund, fund managers won't want it. It's about the economics of what it does for a manager when they invest. It's tempting to ask for special terms but they're coming to realise they've earned a reputation so great that fund managers approach them last."

In a position paper published last week, Clerestory claimed special investment terms weaken property fund structures and endanger the trust between investors and managers.

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