Marketing and Communications More Important Than Ever To Fund Managers

Challenging Marketplace Means Fund Managers Need to Promote Fundamentals and Transperancy To Attract Equity    Well, it was a fun ride while it lasted. The money was flowing in, deals were plentiful, returns were soaring and for some it didn't even require real experience or knowledge in the actual operation of a real estate asset.  As we all know, those days are long gone and some would argue that's a good thing. In their place, however, has emerged a climate that is gar different that the one that lasted from 2004 to 2008. Today, raising money is more challenging than ever and communications between fund managers and their investors is more critical that at any time in recent memory. In this post-Madoff, post-CMBS implosion, post-Lehman world, investors have been severely burned and are more cautious than ever about whom they invest with and more demanding than ever about what types of information they want disclosed to them.   In the past, a minimalist approach was taken in terms of reporting and transparency. Having said that, however, investors were not exactly breaking down doors to obtain detailed information from general partners as to the status of a fund’s investments or to question a fund’s acquisition strategies. Everyone was making outsized returns and as long as the distributions kept pouring in, all were content. As with an unauthorized house party that the parents are bound to discover, this ride had to finally come to an abrupt and crashing halt. For those now looking to raise equity for a real estate fund, it is imperative to recognize that marketing and communicating their defining differences and detailing their track records is critical to their success.  Investors are looking to sustained long-term ROI growth as the key to increasing the value of heir investments now that flipping properties is no longer as prevalent or feasible as it once was.
 
There has been a substantive shift in the general partner/limited partner relationship over the past two years and managers seeking to raise new funds are taking notice. The balance of power has shifted to the limited partnership community and they are flexing that power. Prior to the madness, private equity partnership structures historically were very effective at aligning the
interests of the investors with those of the general partners by ensuring tha the general partners had meaningful equity interests in their own funds and single-minded determination to maximize returns on the underlying investments. Now, however, the reestablishment of these fundamentals is what the investor community has become very focused on. 
 
With investor equity scarce and hard to attract, managers who want to be successful in both the capital raise and operation phases of their next fund must be aware and attuned to this new paradigm. Listed below are a few key points to consider:  

• Marketing the Fundamentals: Fund managers need to work harder at "telling their story" and ensuring it demonstrates a back-to-basics approach. Especially for those in capital raising mode, flip books must be well thought out, clearly outlining defining differences and well- defined and specific investment strategies. Investors have become much more sophisticated and will employ much more discipline and discrimination in their due diligence of a general partner. Thus, to stand out managers must demonstrate how they have delivered and will continue to deliver results. Investors will want to know how value was truly added to an investment.  Were returns achieved more through operational improvements and expertise than capital structure plays and financial engineering? This will be an significant point in their due diligence of a manager’s competence. Having both capital markets excellence and operational excellence will of course be the best scenario. Success simply from cap rate compression will not be seen as a big positive. Marketing deep industry and asset expertise is critical to demonstrating to investors that you are investing in what you have significant expertise in -- not just the “hot” product of the moment.  Demonstrating that you understand that real estate is a long- term asset class that demands a long-term view is important as investors will be more willing to take on risk that is prudent and carefully calculated.

• Alignment of Interests: It is, of course, okay to make money and hopefully lots of it. However, doing so at the expense or mis-alignment of your investors’ interests will no longer be tolerated. Fund managers will need to re adjust their fee structures and have a substantial equity interest in their funds to maintain strong alignment of interests with their limited partners. In a recent Real Estate Alert
  article, the headline read, “Funds Cut Incentive Fees to Attract Investors.” As leverage has shifted to investors, funds are increasingly lowering their incentive fees in a bid to attract capital.  An expectation that managers will profit only and once the assets they acquired are disposed of at a profit is becoming the norm. Management fees are being heavily scrutinized. Investors expect them to be set at a
  percentage that covers normal operating costs for the fund rather than serving as a profit center.  The calculation of carried interest and the waterfall structure are also evolving to better align the financial interests of manager and investor, keeping managers better incentivized to create profitable investments.

• Communication and Transparency: Investors have been heavily battered by the downturn in the economy and have lost trust. Gaining that trust back starts with better and more frequent communications. Communications have generally not been good in the private equity industry and this has to be improved. The days of relationships based
  only on good returns are gone, with transparency and communications now being critical to continued success. Managers need to better understand their investors’ needs and take the time to meet and talk with them on a more frequent and proactive basis in order to help allay the high levels of anxiety. Transparency with regard to how fees and carried interest are calculated is also important, as well as regular reporting of detailed valuation and financial information relating to the underlying assets. With the proliferation of and access to information, investors have become much more educated and have a better understanding of their investments.  Thus they expect a partner who keeps them in the know and discloses any and all information on a timely basis.





In conclusion, while these are only some of the critical areas that will need to be addressed by fund managers, they demonstrate that this is a time of great accommodation in the real estate fund arena. Fund managers will need to focus more than they may have in the past on how they market themselves and how they communicate with their investors. For the foreseeable future and hopefully much longer than that, the ones who will succeed in attracting and raising new capital will be those who are the most open and transparent and who proactively communicate a vision of where they are going and how they will get there.  This is by no
means a revolution versus an evolution. Some would argue that this how it should have been all along. 
  Sagar A. Dalal is the Co-founder and Managing Principal of Beckerman’s real estate fund advisory division. The division works with real estate fund managers by advising on all aspects of the private fund placement process including fund structuring, competitive positioning and market assessment, preparation of fund related documentation, best practices in investor communications and relations as well as developing and executing on their fund marketing/PR program. He can be reached at [email protected].