EUROZONE: Mismatch in paradise

The laid back town of Cannes didn’t fit well with wary investors and fund managers at MIPIM. PERE Magazine, April 2010 issue.

The Gucci and Armani stores, the beach and the town’s beautiful people going about their business in a carefree manner, only unsettle you as they enjoy their lives. 

They are oblivious to all the besuited property folk wearing name badges trying to make sense of a confusing and difficult world.

The confusion among property folk began long before MIPIM was held between 16 March and 19 March. In truth, it began well before when the economic crisis took hold, and the view from MIPIM was that it was set to continue long after the participants returned to their desks in London, Munich and Dublin the following week.

One participant at MIPIM put it this way: “MIPIM this year is like the day after a hangover.” The 18,000 delegates at the 2009 event were hurting so badly from the disastrous state of property investments in Europe and beyond, they were very much in full blown hangover mode. This year, roughly the same number of people attended MIPIM having recovered somewhat, although they were still gingerly finding their way about.

Having spoken with investors and those that advise them at the 2010 event, there remained a confusing picture in private equity real estate.

The confusion is partly because investors are sending out conflicting messages according to their particular sub-set of the investor universe, making it difficult for fund managers to act accordingly.
Take the UK life or pension fund investor, for example.

Many British pension funds want to increase their exposure to overseas real estate and will largely choose non-listed vehicles to do it through. When it comes to real estate in their own backyard, though, the same pensions are thinking about going direct or through joint ventures over the next few years.

In contrast, some large Continental European investors in unlisted property funds are retrenching, rather than pursuing pan-European fund investments. Having suffered as a result of diversification, lack of control and poor performance, investors such as the Italian insurance company Generali, are scaling back on commitments to the unlisted sector.

Sovereign wealth funds – a real presence in European unlisted funds – are also said to be looking to buy property more directly and in club structures with like-minded investors.

All of this is before you look at another investor sub-set such as the high- and ultra-high-net-worth individuals. This type of investor, also at MIPIM, is a fast moving and more fickle animal than pension funds and insurance companies, not being hampered with having to meet liabilities.

Today the ultra-high-net-worths want income, indicating a desire for property funds that invest in prime income-producing buildings. But this is only for today. These same high-net-worths also want alpha returns from distressed opportunities tomorrow. According to one advisor at MIPIM, ultra-high-net-worths are trying to negotiate with core fund managers on redemption rights that will allow them to swap today’s investment in a core property fund into something racier in a few months’ time if their appetite for higher returns for higher risks increases.

Against this backdrop, you have a vast number of different GPs from different parts of the globe all wanting to attract equity commitments from investors. Readers are familiar with many of those firms, but some firms are less well-known. ECE Projektmanagement, NEP Partners, Mount Kellett Capital Management and Wainbridge offer a small snapshot of the firms who all offer different propositions, strategies and skill sets, but who all face the same challenge – getting matched with like-minded investors.

Such issues were the focus of hours of debates and negotiations at MIPIM, as fund managers and investors (as well as their advisors) crowded into Cannes’ five star hotels, villas, restaurants and yachts. The differences between LPs and GPs have been accentuated after the events of the financial crisis, the subsequent investment write downs and the resulting breakdown of trust between the two sides.

The confusion and mismatch was palpable on the streets of Cannes as they mixed with its Gucci-wearing residents walking their Chihuahuas.