The CFO’s and CCO’s Role in Fundraising

PERE Real Estate CFOs Forum

Yesterday, I attended the PERE Real Estate CFOs Forum. These are my notes from this session:

  • Moderator: Steve Felix, Head of Client Relations-Real Estate, Aviva Investors
  • Ira Bergstein, Principal & CFO, Palisades Financial, LLC
  • Jack Foster, Head of Real Estate, Franklin Templeton Real Estate Advisors
  • Asha Richards, Vice President & General Counsel for the Private Equity Funds Group, Brookfield Asset Management Inc.

What is the compliance officer’s role in fund-raising?

Number one is creating a system and process for creating consistent marketing materials and messages to investors. Process and consistency are key. You need to push on the distribution team to be consistent.

What’s changed in fund-raising?

There is a lot of focus on track records and how the firms have dealt with the issues over the last 12 months. There is an increased focus on real estate and investors are paying closer attention to the real estate investments. Part of this is the personal nature of real estate. People inevitably compare their house and the residential real estate markets to the commercial real estate markets.

What’s changed about what investors and potential investors are looking for?

Investors are looking for information to be delivered faster. Investors are looking for projections of distributions, even if they are speculative. Investors are looking for more standardization in the reports.

Managing Private Real Estate Funds – The Changing Role of the CFO and Chief Compliance Officer

PERE Real Estate CFOs Forum

Yesterday, I attended the PERE Real Estate CFOs Forum. These are my notes from this session.

  • Moderator: Gary Koster, Americas Leader- Real Estate Fund Services, Ernst & Young LLP
  • Peter C. Cluff, Principal, Europa Capital LLP
  • Stuart Koenig, Global CFO & Chief Administrative Officer, AREA Property Partners
  • Dominic Petrucci, Chief Financial Officer, Buchanan Street Partners

What are the most demanding issues confronting the CFO role? The panel came up with these:

  • Investor relations
  • Compliance
  • Valuations
  • Liquidity management
  • Debt refinancing

Investor relations is not a new concept, but investors are looking closer at their investments in real estate. Investors want transparency from their investments. There is a need to be proactive instead of reactive and increase disclosure. Investors are being reactive to the financial crisis news. So there were requests for amount of Lehman exposure, Madoff exposure and custody procedures that came out of last year’s crises.

Regulatory compliance is looming in front of the industry. Some of this was a reaction to hedge funds, but the regulatory proposals do not define “hedge funds” and end up putting real estate funds in the splash zone. There is lots of uncertainty on how the regulations are going to affect the business model for private equity real estate funds.

Valuations are an issue because there is so little trading of properties. Tenant rental rates are also greatly in flux. There is increased use of third party appraisals above and beyond the requirements in the fund agreements. The most recent property sales varied widely and offered little help in determining values.

There is some concern that interests are getting out of alignment with more assets getting underwater. Firms need to be aware of the potential conflicts and deal with it head-on. It’s important to emphasize that the general partner sponsors also have money invested and is as much at risk as the investors. The concern is that you might lose good people who are looking for more entrepreneurial opportunities, leaving behind a more asset management focused model. It’s important to keep younger people in the organization because of the valuable lessons they have learned about the commercial real estate market in a downturn.

Debt: The Missing Link

PERE Real Estate CFOs Forum

Yesterday, I attended the PERE Real Estate CFOs Forum. These are my notes from this keynote session by Schecky Schechner, Managing Director, US Head of Real Estate Investment Banking, Barclays Capital.

There is a wave (a wall?) of real estate debt maturities coming due over the next three years.

He started talking about the private markets. There are banks and insurance companies lending to commercial real estate. Lenders are making debt offers are becoming more reasonable. There is less availability over $100 million. Since the valuation of commercial real estate is difficult giving the lack of transactions, lenders are looking more to debt yield. They are basing the amount of the loan on cash flow.

There has been some REMIC relief [See New Rules Ease the Restructuring of CMBS Loans] so that securitized lenders can alter the terms of the loans when there is reasonable likelihood of default. But servicers are somewhat overwhelmed. There are increasing numbers of loans going to special servicing.

TALF is now eligible for CMBS. But there is almost no activity. No deals have priced. There are some questioning whether commercial real estate debt presents a systemic risk

The unsecured debt markets have come back. But this is mostly limited to the public REITs. The credit spread for REIT debt is narrowing form 491bps over 10 Treasury notes earlier this summer to 275bps today.

Mortgage REITs are coming to life. Since June there have been 12 blind pool mortgage REITs filed with the SEC that were looking to raise $5 billion. The cover a spectrum of different business plans. There are some people thinking that the blind pool model may not work. Some think you need to have a partially identified pool of assets. There are also some concerns over the incentive fees put into place. The window seems to be closed right now. The mortgage REITs are using leverage. They are getting REPO facilities and credit lines based on a borrowing base.

The Mezzanine market has lots of money sitting on the sidelines looking for opportunities. But opportunities are scarce.
Subscription lines are scarce. But they are out there. The terms are shorter. There is some concerns that limited partners may be defaulted on their capital calls.

What are the implications for private equity real estate funds?

One is the pretend and extend approach. Lenders and investors are hoping to get through it, with time healing the problems.
Another option is TALF. But access seems limited.

The last and most interesting is the public option. The buy side of the market is looking for internally managed with a focused market approach. You may be able to recapitalize with public equity. The volatility of the public equity market has declined. Mutual fund flows have turned positive. Risk appetite has increased. Public company implied cap rates are trading tighter than their private counterparts.

There is also increased activity in “Make-a-REIT” filings. Sponsors are looking to expand their current portfolio and bulking up the portfolio in connection with the public offering.

Shifting Regulatory Landscape in the US and Abroad

PERE Real Estate CFOs Forum

This afternoon, I am speaking at the PERE Real Estate CFOs Forum in New York on the Shifting Regulatory Landscape in the US and Abroad.

Moderator: Gilbert D. Porter, Partner, Haynes & Boone LLP
Panel Members:
Andrea Carpenter, Director, INREV (European Association for Investors in Non-listed Real Estate Vehicles)
Doug Cornelius, Chief Compliance Officer, Beacon Capital Partners
R. Eric Emrich, Chief Financial Officer, Lubert Adler Partners, L.P

We are starting the discussion with the EU AIFM Directive and its potential implication on fundraising and operations in the European Union.  Then we move onto the four bills aimed at regulating private funds: the Hedge Fund Adviser Registration Act of 2009, the Hedge Fund Transparency Act of 2009 and the Private Fund Transparency Act of 2009 and the . Then we end with the SEC’s proposed Pay to Play rule and the Say on Pay bill.

I am leading the Pay to Play and Say on Pay discussions. Here is the slide deck that I am using:

Shifting Regulatory Landscape in the US and Abroad

Capital Markets Regulatory Reform: Enhancing Oversight of Private Pools of Capital

Capitol_dome

Today, the House Committee on Financial Services heard testimony on Enhancing Oversight of Private Pools of Capital. This seems to be is response to the draft Private Fund Investment Advisers Registration Act. Congressman Paul E. Kanjorski (D-PA), Chairman of the House Financial Services Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises, released a discussion draft of the bill.

This was likely to be a battle over who gets regulated. Congressman Kanjorski opened that door by including a registration exemption for “Venture Capital” funds, with no definition of what that means.

Panel Two—Enhancing Oversight of Private Pools of Capital

Rep. Paul E. Kanjorski emphasized that the committee wanted to works with the industry to impose regulations that would not burden the industry with lots of compliance costs.  His audience of fellow Congressmen was limited. There were more empty seats than Congressmen.

The panelists emphasized that the full burden of the Investment Advisers Act would inhibit the private fund industry. They also pointed out that many of the types of private pools of capital (other than hedge funds) do not have systemic risk and were not part of the cause of the financial industry issues.

The hearing did include a battle over whether there should be registration and who should be registered. “We only deal with sophisticated investors, we think we should be treated differently than retail investments.”

Update on the European Directive to Regulate Alternative Investment Fund Managers

eu

The draft Directive on Alternative Investment Fund Managers pdf-2 was published on April 30, 2009. The Proposed Directive has been subject to lots of criticism. Many of the provisions in the Proposed Directive misunderstood the characteristics of different types of alternative investment funds.

It now seems the Proposed Directive will be implemented in one form or another. (The EU’s focus on financial market reform has not been distracted by health care reform like happened here in the US.)

The first problem with the proposed directive is that it has broad definition of “alternative investment fund” so it can sweep up all hedge funds. It seems the the Presidency of the European Council has noticed that the existing definition would capture funds that clearly should not be the target of the Proposed Directive. [see AIFM Issues Note from the EU Presidency]

Unless non-EU managers comply with the rules within three years of the Directive coming into force (probably around 2015) they will be barred from offering their products in the EU. Britain, another center of hedge funds and private equity is campaigning to water down the directive. France, Spain and Germany seem to be very pro-directive and in favor of stiffer regulations.

Britain’s financial services minister, Paul Myners, told a conference: “Smell the coffee! There is going to be a directive.”

For more detail read a client alert from Shearman & Sterling: Update on the European Directive to Regulate Alternative Investment Fund Managers.

References:

Updated FTC Guidelines Affect Testimonial Advertisements, Bloggers, Celebrity Endorsements

On October 5, the FTC released their updated guidelines to advertisers on how to keep their endorsement and testimonial ads in line with the Federal Trade Commission Act.

The guidelines were last updated in 1980. Clearly technology and publishing has changed significantly in the past 30 years.

The revised Guides also add new examples to illustrate the long standing principle that “material connections” (sometimes payments or free products) between advertisers and endorsers – connections that consumers would not expect – must be disclosed. These examples address what constitutes an endorsement when the message is conveyed by bloggers or other “word-of-mouth” marketers. The revised Guides specify that while decisions will be reached on a case-by-case basis, the post of a blogger who receives cash or in-kind payment to review a product is considered an endorsement. Thus, bloggers who make an endorsement must disclose the material connections they share with the seller of the product or service. Likewise, if a company refers in an advertisement to the findings of a research organization that conducted research sponsored by the company, the advertisement must disclose the connection between the advertiser and the research organization. And a paid endorsement – like any other advertisement – is deceptive if it makes false or misleading claims.

By the way, I don’t receive any income, advertising dollars or free product in connection with ComplianceBuilding.com. If do, I’ll let you know when I write about it. (Feel free to send that new BMW for me to review.)

The other interesting aspect of the Guidelines is how they treat celebrity endorsers. The revised Guidelines make it clear that celebrities must disclose their relationships with advertisers when making endorsements outside the context of traditional ads, such as on talk shows or in social media. I am waiting to hear the first disclaimer on Regis and Kelly.

Text of the Federal Register Noticepdf-2

National Breast Cancer Awareness Month

national breast cancer awarenes month

October is National Breast Cancer Awareness Month. Compliance Building, like many others, has gone pink to promote and support the world’s fight against breast cancer.

After watching the NFL players sporting pink accents on Sunday, I figured I could do the same thing. So I updated the website and changed many of the colors to pink.

Since the National Breast Cancer Awareness Month began in 1985, mammography rates have more than doubled for women age 50 and older and breast cancer deaths have declined. As a result, breast cancer deaths are on the decline. Encourage the women in your life to get mammograms on a regular basis.

You can also offer financial support. I encourage you to donate to the Susan G. Komen for the Cure.

Breast cancer is the most common cancer in women in the United States, aside from skin cancer. According to the American Cancer Society, an estimated 192,370 new cases of invasive breast cancer are expected to be diagnosed among women in the United States this year. An estimated 40,170 women are expected to die from the disease in 2009 alone. Today, there are about 2.5 million breast cancer survivors living in the United States.

Thanks to the folks at Corporate Compliance Insights for giving me the idea: CCI “Goes Pink” To Support Breast Cancer Awareness Month.

More on the Private Fund Investment Advisers Registration Act of 2009

Capitol_dome

There are three and half bills in Congress for regulating private investment funds. The Hedge Fund Adviser Registration Act of 2009, the Hedge Fund Transparency Act of 2009 and the Private Fund Transparency Act of 2009 are all sitting in committee. The half is the proposal from the Obama administration: Private Fund Investment Advisers Registration Act of 2009. The Obama bill has not yet been submitted.

The National Venture Capital Association has been lobbying hard (or at least effectively) to get some changes in the bill before it is submitted. There is now new language in the bill that reads:

(l) EXEMPTION OF AND REPORTING BY VENTURE CAPITAL FUND ADVISERS.—The Commission shall identify and define the term ‘venture capital fund’ and shall provide an adviser to such a fund an exemption from the registration requirements under this section. The Commission shall require such advisers to maintain such records and provide to the Commission such annual or other reports as the Commission determines necessary or appropriate in the public interest or for the protection of investors.

Of course that still defers the very difficult task of defining a “venture capital fund” from the various types of private investment funds.

In a statement from Mark G. Heesen, president of the National Venture Capital Association:

“This proposal recognizes that venture capital firms do not pose systemic financial risk and that requiring them to register under the Advisers Act would place an undue burden on the venture industry and the entrepreneurial community. The venture capital industry supports a level of transparency which gives policy makers ongoing comfort in assessing risk.”

References: