The proliferation of private opportunity funds in the US and Europe targeting distressed property amid the fallout from the credit crunch is increasing pressure on managers to accept 'special terms' from investors, according to New York-based fund of funds manager Clerestory Capital Partners. 'This issue needs to be more widely debated, as it could weaken real estate fund structures and endanger the investor/manager trust relationship that is the lynchpin of the market,' the company says in a position paper entitled 'Fair Trade: The Wisdom of Setting Equal Terms'.
The proliferation of private opportunity funds in the US and Europe targeting distressed property amid the fallout from the credit crunch is increasing pressure on managers to accept 'special terms' from investors, according to New York-based fund of funds manager Clerestory Capital Partners. 'This issue needs to be more widely debated, as it could weaken real estate fund structures and endanger the investor/manager trust relationship that is the lynchpin of the market,' the company says in a position paper entitled 'Fair Trade: The Wisdom of Setting Equal Terms'.
As competition for investment capital among funds increases, so the temptation for managers to accept investor demands for preferential treatment is growing, Clerestone says. 'This convinces us that the principle of equality of terms among investors in funds is even more crucial now, as we believe it leads to a more efficient management process, a better product, a higher-quality investor base and ultimately, better performance,' Clerestory principal and co-founder Joanne Douvas notes.
Special terms could include things like the investor taking a share in the manager's carried interest, exclusive co-investment rights or exclusive rights to a UBTI clawback.
In the first quarter of 2008, Clerestory identified 128 small-cap (funds raising less than $ 1bn of equity) opportunity real estate funds seeking to raise $54bn (EUR 34.6bn) in equity, compared with 107 funds looking to raise $45bn in the third quarter of 2007.
Although there were more small-cap opportunistic funds seeking deals in the US (51) and Asia (47) than in Europe, the European vehicles showed the largest proportional rise, increasing in number to 24 in the first quarter of 2008 from 14 in the same 2007 period, Clerestory found. In terms of the most popular investment regions, Asia topped the league at $22bn in the first quarter, followed by the US ($19bn) and Europe ($11bn).
