EUROPE – Pension funds are unwittingly making themselves vulnerable to "total idiot" local operating partners in their flight out of funds into separate accounts, according to a director of $25bn (€19bn) alternatives asset manager Angelo, Gordon & Co.
Anuj Mittal, whose firm is also investing $2.5bn in the European CMBS market, told IP Real Estate: "In my list of 400 operating partners, there are five I think are smart and a majority most people agree are idiots. But there are around 20 below the top five who are very convincing.
"I see them doing deals with big money because they can put the presentation together and tell investors what they want to hear.
"Three years later, it falls apart because they couldn't manage construction risk or planning risk."
Asked whether investors should increase their focus on counterparty risk, he said: "They should, and they do. Our investors trust us, and our operating partners can't sneeze without our permission."
Yet he acknowledged many pension funds and sovereign wealth funds lacked the expertise to identify credible partners.
Below the top 3-4% with sufficient nous to scrutinise operators – including large Dutch pension funds and Middle East sovereign wealth funds – many institutions opting for separate accounts underestimate the work involved in identifying credible local partners.
"For 25 years, we've been figuring out who's smart and who's not smart," he said.
"We want to know who will bring in a project within budget, who can negotiate rents and who knows the leasing brokers. It's hard work, actually.
"There are quite a few institutions tempted by the separate account route, and by the temptation of doing it themselves.
"I wouldn't be surprised if they return to funds within a few years when the deals go wrong."