A new era in real estate investment management is here and this is day zero

and I am excited about it

"Progress is impossible without change, and those who cannot change their minds cannot change anything."
– George Bernard Shaw

The real estate investment management industry changing. The change is going to feel very slow at first… and then it will be all at once. I can’t tell you if this will happen in 6 months or 6 years but I am very confident that what has gotten many to this point, will not get you to where you want to be going forward.

Let me highlight a few of the biggest changes and what I am seeing the best investment managers do to embrace and evolve.

A shifting landscape for providers of capital to private markets, including CRE. Traditional institutional capital sources are encumbered by massive structural headwinds. Namely, people are living longer… much much longer than the actuarial models suggest leading to a long term adverse influence on pension fund liabilities. As a result of the challenges in the traditional defined benefit model, GP’s are turning to alternative sources of capital. One of which is the individual investor, often referred to as “private wealth”. Within this category you have a several subsets of investor types… being clear on your target audience matters a lot.

These new investors have different expectations for their capital. Some will see investing in private markets as a way to generate “alpha” and others will see it as a “diversifier”. The reality however is that most don’t yet know what they should see it as so are approaching the space with cautious optimism and a big aperture. Nearly all are trying to wrap their heads around the traditional closed-end fund structure which requires capital to be locked up for 7-10+years in a traditional closed-end or “draw down” fund. It’s not attractive to private wealth and as a result we are seeing open end funds and interval funds rise in popularity.

If you want a masterclass on the history of institutional real estate, look no further than this episode of The Distribution with Geoff Dorhmann, Founder and Chairman of IREI (Institutional Real Estate, Inc).

The decks are clearing… and it’s a combination of a bulldozer ripping across the deck and people jumping over board. With the end of the ZIRP (zero interest rate policy) era over, this new cycle is testing the skill and will of many investment managers which are facing broken capital stacks, reluctant investors and a lot uncertainty ahead.

"It is not the strongest of the species that survive, nor the most intelligent, but the one most responsive to change."
– Charles Darwin

We are at the start of a new cycle and it’s already testing the fortitude of many, especially those who are not cycle tested. As a result, many business models have been rendered obsolete and other business models will need to be re-worked to factor in the realities of this new period. Here is what I am starting to hear and see:

• GP’s that have built great businesses with true “enterprise value” may deem now is the right time to sell and/or double down.. They have options

• Others will be forced to liquidate. The reality is when your capital stack is broken, you normally need to sell the “winners” to pay for the “losers” making it more challenging to persist with a portfolio of assets you wish you didn’t own. Key to success will be working with your lenders. The shift from banks to private credit is real. This is a whole new dynamic we can cover later.

• Many will walk away, either by choice (because it’s hard… or because they have the financial ability to do so) or necessity (their business model is broken, they have run out of money) or otherwise. There are questions to what happens to to the assets and LP’s if a GP decides it’s time to close up shop and focus on a new career?

• Investors will want/need liquidity. Liquidity solutions will become a feature of all new investment strategies going forward and we will see massive innovation in this space (enabled by technology which helps with transparency… see below for more). GP led, LP secondaries will be a very real thing going forward. Jeff Giller, Head of Real Estate at Stepstone group talks about their approach and the history of secondaries (so far).

• Some sponsors, especially larger institutions will pivot to private wealth as an increasingly important source of capital. Origin Investments and Forum Investment Group (hyperlinks are to past episodes of The Distribution with the Founders of each firm) built their business from the ground up to focus on this sector. I expect to see more of this type of intentionality going forward, especially from historically institutional investment managers like Blackstone.

Business models will be re-worked and the ‘undifferentiated heavy lifting’ will be outsourced to others. Focus will be key. Many I speak to will confidentially share that in the go-go days it was easy to chase the next deal, hire the next accountant and launch the next fund but that doing all of this resulted in a loss of focus and the loss of focus resulted in negative impacts on returns, margins and morale. Alpha will transcend investments to include operations. The investment manager of the future will be built around four things:

• Technology

• Talent

• Transparency

• Trust

Technology

I hope by now, I do not need to tell you about why leveraging technology is critical but perhaps it’s important to remember how quickly this shift has taken place, especially in real estate. In 2017, as I was helping the Urban Land Institute launch their technology product council I stood in a room of senior real estate exec’s (I mean… really senior, CEO’s, Chairman, etc) and asked “who is a technophobe?” (this was a popular term at the time) and the response was overwhelming. Nearly every hand shot up into the air. Some jumped up to show their enthusiasm for this label. The audience of executives was so proud. They were resisting the change. The good news is.. they “had people who did this for them”. Well, those days are over. It’s not longer about real estate and technology. It’s just real estate (or private markets) and technology is a part of it, like it or not.

Technology has many benefits but as it relates to the modern investment manager, it enables flexibility and efficiency. It enables you to harness the power of your data to make better and more efficient investment decisions, to see problems before they arise, to launch new products and onboard new types of investors. My company, Juniper Square was the first to come to market with dedicated investor relations technology which enables a investment manager to report to investors in a highly personalized way, at scale without needing to add head count… resulting in more flexibility to raise money in smaller increments from more investors and more.

Between the “technophobe era” and today we have seen a phenomenon emerge… the desire to use “technology” as a differentiator. It’s not. It’s tables stakes. I have spoken with many LP’s, both institutions and individuals that are off put by GP’s launching VC firms and marketing “tech enabled”. They expect this. So here is my recommendation: Don’t pitch the fact you use technology but rather pitch the outcomes that your use of technology deliver, relative to your peers. Be specific. Quantify it. This is your ROI.

Brad Hargreaves

nails this concept with a recent LinkedIn post. He has some great resources for tech founders that are also applicable to GP’s who use technology and use it as a differentiator. This quote by Brad sums it up “Stop leading with "digital transformation." Start showing how you impact their immediate capital problems.”

Talent

People matter. Relationships matter. They are the lifeblood of your organization. Invest in your best people. Pay them well. Over pay for them. Create alignment in incentive packages that result in long term partnership. Give up your economics to keep them. It’s hard to find exceptional talent. A great colleague can produce a 10x return on investment whereas an average colleague could be a 1x or even a drag. One key things so many executives miss… The cost of replacing someone great is far greater than the cost to keep them at your firm. Don’t let the great ones go. Having great people improves the value of your company.

Your talent strategy needs to evolve. GP’s can no longer afford to have huge teams doing work that others can do more efficiently. More over, GP’s don’t get “credit” for this work and the costs to carry big teams will have a drag on investment returns. The world is shifting toward specialization and in many cases outsourcing. Ask yourself, “is this work creating differentiation for me and my business?” “Do my competitors have to do the exact same thing?” If the answer is yes, then it’s likely something you will want to outsource. Leveraging third parties AND treating them like partners will give you more operational flexibility, reduce your costs and likely improve the quality of your work. A perfect example of this is around the administration of your fund.

The investment manager of the future will have way fewer employees and will be far more reliant on partners to support them. Vendors will become partners and a critical part of the GP’s business model. Outsourcing is the future.

Meghan Reynolds, Partner and Head of Talent and Investor Relations at Altimeter a leading tech focused investment firm gives a master class on talent, trust and transparency on this episode of The Distribution.

Transparency

Few words in our industry result in more debate than “transparency”. When I am talking about transparency I am talking about transparency around investment returns. In CRE, this often means providing details on the performance of assets. I have seen a shift over the years where the word transparency has gone from a negative to neutral to an expectation.

We are now in the “transparency and trust era”

As the business strategist Max McKeown says "Adaptability is about the powerful difference between adapting to cope and adapting to win."

GP’s have been coping with ever increasing requests for transparency. From investors, from regulators and from colleagues. The game has changed. As GP’s focus on diversifying investor relationships (remember, the old ones have structural challenges) establishing trust is essential. There is no better way to establish trust than through transparency.

Historically, GP’s have had 2 primary objections to transparency:

1. Confidentiality. If I share my information with you, others will know and I will lose my edge. Do I have the ‘will’ to change.

2. Complexity. What you are asking me to do is hard. Do I have the team and tools necessary to provide transparency to you. Do I have the ‘skills’ needed to do this.

Opacity may still be an edge for GP’s but the reality is that differentiation going forward will need to happen via operational alpha. Do you have the best talent to outperform your peers? Do you have the most efficient business to remove any drag on returns? Do you have a unique strategy to manage an asset better, turn units faster etc? Can you help your portfolio companies grow faster? This is operational alpha.

The future will be transparent. Your performance, your investment returns will be knowable. Start acting like that today and building the culture, the systems and process to enable this future. I believe this will be the only way going forward and if you want to be trusted with capital from others, you will need to play by their rules. Institutions and individuals will demand transparency and we will see the best managers embrace this… It will be messy but sometimes getting it all out on the table is the fastest way to build or re-build trust. Start now.

The reason I have such high conviction that the market forces will require transparency is because the second objection listed above has been/ is being removed.

Historically, one of the biggest challenges facing GP’s and private investment managers has been the fact that their data has been disorganized and in many instances the GP’s has been dis-intermediated from their financial data by third parties like fund administrators. This model is changing. Technology and technology enabled services provide GP’s with the tools they need to report to their LP’s. And most importantly provide the flexibility to do it in a range of ways.

It’s not perfect.. yet. But this is a very solvable problem that many great firms, including Juniper Square are working hard to solve. It starts with structured and organized data and it ends with technology enabled services that help the GP’s use that data to fulfill their fiduciary obligations. Essential to this transformation is the fact that GP’s own and have continuous access to their own data. This builds trust between the GP and their service provider and it helps ensure the GP has the data they need to build trust with, and fulfill the reporting expectations of their LP’s.

Complexity still exists but the scaffolding to support GP’s in meeting the needs of their LP’s is evolving. The market is racing toward transparency and each GP will get there on their own, at their own pace and it’s the job of the industry to meet them where they are and help them on this journey.

I am not confident we will ever agree on a “standard” way of reporting for private markets. Groups like ILPA and others have tried. The reality is the needs of LP’s will constantly evolve and every GP has a different perspective of what is right and wrong. Absent regulatory oversight mandating standards, private markets will always suffer from continuous change in reporting and as a result, to be prepared, GP’s need a infrastructure that enables flexibility and focuses on structured and clean data.

Trust

In hundreds of conversations with LP’s over the last decade, the most consistent theme has been “trust”. This manifests itself through the discussions on the importance of relationships. The importance of education. The importance of responsibility and honesty and integrity but at the end of the day it’s pretty simple. GP’s and LP’s are humans. Humans want to spend time with other humans they trust.

But it’s not so simple. How do you establish trust with someone you don’t yet know? While I do not have the answer, my belief is that private markets is entering the “authenticity era”.

One way to establish trust is by creating a brand that people know, understand and trust. The days of corporate censorship are over. Investment management has gone mainstream and the smartest investment mangers are investing in their brand and ensuring that the brand conveys trust. Look no further than Blackstone’s shift from Wall Street to main street. This has been a deliberate shift and carefully orchestrated, yet seemingly authentic. Their holiday video is a perfect example of this.

I plan to write much more about this in a future post as it’s a topic that is near and dear to my heart but in the meantime, I would listen to this recent episode of The Fort Podcast by my friend Chris Powers where he sits down with Krish Menon to discuss how the worlds most iconic brands are built.

Trust has been a theme with many of my pasts guests on the Distribution. I’d encourage you to listen/watch my conversation with Joan Solotar - Global Head of Private Wealth at Blackstone.

It was just 1 year ago that Jon Gray from Blackstone joined LinkedIn. Today, he has become well known for his candid commentary, running videos and more. One year… Don’t wait to get started. You can start today. My next post will share some tips on building your personal brand using LinkedIn so if you have not already click on the “subscribe” button below so you don’t miss out.