What looked at first like a straightforward fund investment turned out to be the mother of all contracts, complete with multiple caveats, opt-ins and get-outs. The recommendation document, presented to the Oregon Investment Council (OIC) for a "strategic partnership" between the $59bn (€41.6bn) Oregon Public Employees Retirement Fund (OPERF) and Prologis, opened with an ‘inexotic' $75m capital injection in the logistics firm's European Logistics Fund.
But that was just the start. Under the terms of the deal only provisionally approved, OPERF will channel equity into Prologis logistics funds and joint ventures via a feeder vehicle set up for the purpose. The cautious language - ‘may', ‘subject to', ‘potential' and ‘anticipated' - reflects the pension scheme's caution about signing up for a long-term commitment to what is, after all, a new structure.
"Every negotiation is different," says OPERF spokesman James Sinks. "You can't say that this particular deal, especially with its creative structure, is a model for OPERF future deals."
If the caution is understandable, the willingness to sign up for five years (with most investment likely in the first three) is less so. Given the amount of capital OPERF is willing to invest, it would likely have first refusal on upcoming opportunities. So why commit for long term? "Better fees," says Sinks.
Which takes you to the heart of the deal. Two things are clear from the document presented to the OIC. The first is a concern over control. The agreement commits OPERF to little except the provision of capital. While Prologis will offer the pension scheme future co-investment and joint venture opportunities across vehicles and categories, with a focus on value-add, OPERF "may notify Prologis whether and to what extent it desires to invest [and] will reserve the right to decline an opportunity for investment".
It is not just large US public pension schemes that are concerned about being locked into property investments they can not properly control. Robert Stolfo, director of business development at Invesco Real Estate, points out that German investors tend to prefer vehicles they can manage, such as clubs, to large, anonymous funds, which they can not.
"They tend to like more control over illiquid investments they can't get rid of easily or quickly," he says. "There is a stronger need for control over investment decisions because they can't exit those decisions easily. With bonds and equities, they can press a button and get out of them."
This tendency comes in part, he says, from the fact that institutional investment decision-makers often come out of the real estate industry rather than finance. Although it is not necessarily a bad thing, it does demand certain skills. "There's more work from the management side and a bit more sensitivity about pulling together investors," says Stolfo.
The second concern in the document is about fees. Of the seven-point rationale laid out by the pension scheme for the investment - including global ‘most favoured nation' rights, relatively low-risk access to emerging markets and opportunities for co-investment - number one is the management fee rebates on invested capital.
Reducing fees is a general principle. "Yes, fees have been a focus for the OIC, which believes strongly that interests should be aligned when it comes to the fee structure," says Sinks.
"Again, every deal is different so there is no standard answer, but the OIC is keen to ensure Oregon has the best possible terms in every investment made, and it's not uncommon for the OIC to make a commitment contingent on fee reductions."
Arguably, that is simply what a buyers' market looks like. "It's quite simple, really. It's about market forces," says Deborah Lloyd, corporate real estate partner at law firm Nabarro.
"Fund managers are still desperate to raise equity. If investors want to commit large amounts of it, fund managers will bend over backwards to accommodate them. Some managers are getting more in line with better corporate governance, lower fees - in short, doing whatever investors want them to."
Nor is it exclusively a luxury for pension schemes with $500m to spend. Lloyd points out: "If investors see one investor getting preferential fee terms, most want the same fee deal," she says.