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: