GLOBAL - Institutional investors are coming under pressure to become more actively involved in the management of their commingled real estate funds as managers struggle with the effects of the downturn.
But there are many factors that prevent limited partners (LPs) from taking greater control of their fund investments, as delegates learnt at the IMN Distressed Real Estate Symposium in London last week.
Speaking on a panel debate, James Burdett, partner at law firm Baker & McKenzie, said passive institutional investors were under greater pressure to take a more active role.
"Some of them run a business model that is completely hands-off and would be averse to any active involvement," he said. "They are now realising that they have to be".
The question was posted posed by Tommy Brown, principal at Clerestory Capital Partners as to whether larger investors with greater anchor stakes in funds should take the lead in representing the concerns of LPs.
But Burdett said many "anchor investors" had limited experience outside securing favourable terms, such as lower management fees.
"[They] are only just learning how to be active as investors in an LP capacity," he said.
LPs in a fund have the power, in theory, to club together to replace a general partner (GP), or even appoint a ‘super GP' who could oversee the incumbent manager.
Both Burdett and Peter Lewis, senior investment director at Boston-based insurer Liberty Mutual, all but ruled out the practice as too time-consuming, costly and ultimately self-defeating.
"The manager knows more about the investments than anyone else," Lewis said.
He suggested the possibility of establishing investor committees that would represent the interests of LPs - a "natural group to deal not only with conflicts but with unexpected problems like those we are all facing."
That said, it was agreed that the biggest barrier to LPs coming together to protect their interests were agreements that kept the identities of individual LPs confidential from each other.
John Dwyer, head of real estate at multi-family investor FF&P Asset Management, reported seeing an increased number of funds with such confidentiality agreements. And for Dwyer, this effectively prevented him from investing.
"I do not invest where I do not know who the LPs are," he said. "If they can't share their identities with me, I am not going to invest with them."
Liberty Mutual also requires knowledge of fellow investors before entering into a fund.
"We are more comfortable investing alongside groups that think similarly to the way we think," Lewis said.
"It's not that important when everything goes well. It's really important right now - you've got to be well-aligned with your other LPs."
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