Routes to recovery for real estate fund managers

Outsourcing is allowing fund managers to focus attention on their core business of capital raising and investing in an era of ever-growing demands from regulators and investors, says Ocorian Head of Alternative Investments, .

The global economy has been rocky for the past 18 months, yet real estate investment managers have had no let-up in the demands placed on them by investors and regulators. At a time when managers need to focus on assets and investors, the demands of their back and middle offices are growing. Technology offers a solution, but can also be another potential headache.

Impact of Covid-19 on real estate investment managers

We see a large number of managers re-evaluating their business models and considering if there are other ways of working. Any business, when there are periods of change or even distress, will look to focus on its core competencies. For private equity real estate managers, there are probably two core pillars: firstly, the underlying assets, making sure you can buy good stock, manage and enhance it and then either enjoy the income return or sell it to create a capital return; and secondly, looking after their investors to meet their objectives and to ensure a future supply of capital.

Of course, there’s a tremendous amount of work to be done between those two pillars, and for managers, that kind of work, whilst key, is not at the heart of what drives their business performance. So, for a manager wanting to focus on their core competencies, this middle or back office work is the area to consider another way of working.

Managers are, in some cases, dealing with distress in their own portfolios, especially in the retail and hospitality sectors. But for capital rich managers and investors, this is an opportunity. The need to be able to move quickly is key because the opportunity and response needed to that market opportunity is now, not in a year’s time. So, working alongside business partners, like Ocorian, enables them to respond to the market when they need to and to scale up without having employed more middle office teams.

On top of this, there is continued pressure on fees… Having in-house middle office and technology teams also favours larger groups, as they can spread the cost of functions across greater AUM. The other choice is outsource these middle office and technology functions to specialist business partners who are able to spread the cost across a far wider client group.

Managers need to adapt to operational challenges

The starting point is to determine their underlying business goals, and where they see their business going. And that involves breaking down the composite parts of their business as well. For example, do you decide to maintain an internal legal team, or do you outsource it? Do you maintain teams of accountants completing the bookkeeping and payment of invoices, producing management accounts and lender reporting? Or do you outsource that? Are your investors happy with the manager sitting on the fund or holding boards or do they expect independent boards?

The day-to-day company secretary work in property investment structures typically involves multiple companies. This is important to create liability blockers between assets. For large portfolios this involves sometimes hundreds of special purpose vehicles, possibly companies, unit trusts and partnerships in multiple jurisdictions each with their own legal and regulatory framework. Ensuring each entity is maintained in good standing is important, especially if share sales are expected as a future exit, but if your core competency isn’t managing the governance required, could you ask a specialist to take the strain? This is something Ocorian’s real estate team specialises in and is the topic of conversation we have with many of our clients.

The other area we’re seeing managers examine more and more, particularly on the fund side, is increased governance, looking at enhancing the governance of the fund or structure to meet growing investor demand. So, that relates to having independent boards, having scrutiny panels, committees, and maybe investor committees, which can critically review business independently from the fund manager. Ocorian’s real estate director team are seeing increased calls to provide directors to boards and this is an area where we expect to see more activity.

Technology can relieve the burden of regulation and reporting

Managers need to consider how to keep of all their fund and investor data in a safe yet accessible way, and how they are going to manage it, whether internally or externally.

Good technology can do marvellous things, but it’s also expensive and requires significant investment in both procuring and maintaining systems as well as the specialist people able to manage it. And, of course, none of this is a core competency for a real estate investment manager. Managers can choose to leverage fund administrators like Ocorian who spread the cost of technology across many clients. Whereas if you’re a fund manager with, say, two or three funds, the cost divided across just the two or three funds can be quite costly. Naturally, bigger managers can have their own technology solutions.

Fund solutions

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