An Emerging Manager Survival Guide

As emerging managers take that giant step of becoming institutional investment managers, many discover that the reality is not as glamorous as the dream. Three emerging managers, Jackie Brady,Ward Fitzgerald and Todd Minnis, discuss what it takes to survive the fundraising trail. After years of being the operating partner to a real estate allocator fund, you can understand why many would want to cut out the intermediary. In a world where investors are eager to invest directly at the asset level and get closer to the real estate, why shouldn’t operating partners become institutional fiduciaries as well? By some accounts, there are more than 400 reasons not to. That is, more than 300 other emerging managers who are also trying to raise capital in a very competitive market. The going is not tough—it’s downright brutal for anyone considering a career as a private equity real estate GP. PrivcapRE spoke to three emerging managers— all at various points of the emerging-manager ‘To be a good life cycle—on the realities of striking out on their investor is only own and what it takes to succeed today. “It takes an amount of tenacity and perseverance to keep an honest dialogue with investors,” says Ward Fitzgerald, CEO of logistics specialist -Todd Minnis Exeter Property Group. And he isn’t just talking about the fundraising process, either. From raising capital to reporting, recruiting, and retaining talent and being the best fiduciary you can be, taking that step into the institutional real estate investment world can be more like a giant leap. Todd Minnis, CIO of Cypress Equities, says that before even thinking about raising money, a new manager has to determine which LPs have capital to allocate to their niche strategy. Minnis, a retail specialist, says: “Being that first-time manager and sector-specific can be limiting, because you don’t know who has capital for this space.” When Cypress started fundraising last year, investors were just beginning to return to retail. “We had a successful raise, but that takes a lot of good meetings,” adds Minnis. “[But] I’m glad we went through it, because having our own discretionary capital targeting our sector has changed our business.” Ward Fitzgerald of Exeter Property Group says that being an integrated operator has its benefits, but a downside is a narrower pool of potential investors. “It limits our universe and constrains growth. The likelihood of raising $1 billion to $2 billion is remote; our story is more in the $400 million to $800 million range. We’re comfortable with that.” Jackie Brady, the former manager of BNY Mellon’s debt platform, explains that the debt niche is “a strange animal” for many LPs. In some firms it operates as fixed income; in others it’s real estate. Although the firm had a pretty good sense of potential partners, she knew Canopy would need to broaden its network to raise money. By the end of 2012, her team structured a commingled mezzanine debt product, but the market tightened. By October 2013, Brady had adapted its strategy and agreed to a JV partnership with The Carlyle Group, originating loans between $5 million and $15 million. However, is only a fraction of the battle. Once you’ve gained traction, then comes the due diligence and fee negotiations. “It’s similar if not worse than running for political office,” Minnis says. “We can’t compete with KKR or Carlyle, because they are on Fund X and have built their platform. The key is to be transparent with your budget,” Minnis continues, explaining: “Investors want to know everything, and you have to be prepared for it. As an emerging manager, I can’t commit $50 million of my own to the fund. So to justify your fee, you have to set your budget on the table.” Fitzgerald explains it’s a case of being honest. Very honest. “You have to be upfront about your personal bank account, car, and address. It does resonate with investors.” But key to all the capital raising, diligence, and negotiations is reporting and how an emerging manager communicates with investors. Brady, Fitzgerald, and Minnis all agree that good communication will help a first-time fund manager make it to Fund II. Fitzgerald warns other emerging managers that its senior executives can’t just focus on the investing side and overlook investor relations: “We got good advice when we started about spending senior executive time [on reporting]. Senior executives have to commit thought to those relationships.” He continues: “It’s a bit clichéd, but when you get discretionary capital, investors trust you a great deal and you need to give complete transparency, integrity, openness.” And for many investors, they’d rather be told too much than too little, according to Minnis. “We got positive feedback because we reach out a lot. Investors want to be exposed and understand the space, so we tend to overcommunicate.” Brady agrees and argues that these values must be ingrained in the firm’s culture. Approaching clients as partners instead of customers is critical to enriching any relationship, she explains: “You should inform them of things beyond what you can give them. Tell them about what you’re seeing in the market, even if you can’t do it in the portfolio.” In 2007, for example, the Canopy team saw an opportunity to short CMBS. The move was prohibited in the fund they were managing at the time, but Brady encouraged investors to pursue the opportunity with other players. In 2008, her team had no qualms about informing investors in the BNY Mellon legacy fund to expect heavy losses. It was before the Lehman Brothers meltdown, when many LPs couldn’t fathom the depths to which the market could drop, and many investors had never witnessed this level of honesty. “We told several investors they could wear rose-colored glasses,” Brady recalls, “but we won’t.” Brady advises keeping yourself on the investor’s radar. In 2012, Canopy met with several endowments they knew wouldn’t invest right away. “We want them to understand how the debt markets function,” she says, “even though we well know the product doesn’t fit their needs yet.… But when it becomes more attractive, we want to be on their radar.”