Fund-of-funds Thrive on DC Cash

The departing head of Franklin Templeton’s direct real estate group, Jack Foster, talks about the outlook for real estate GPs and multimanagers after leaving the firm this month.

Jack Foster, the man who created Franklin Templeton’s real assets multi-manager business and REITs platform and is departing the firm this month, says it’s getting “harder and harder” for fund-of-funds shops to succeed.

As institutional investors increasingly look to reduce the volume of manager relationships they have and commit larger checks to fewer GPs, Foster says the multimanager space will become even more challenging.

However, the former head of direct real estate at Franklin Templeton Real Asset Advisors says there could be a silver lining for multimanagers—the defined-contribution pension world.

As DC plans slowly embrace private real estate within their portfolios, multimanager operations could come to their aid. “There’s always going to be space for excellent fund-of-funds businesses in real estate, and frankly we may see a re-emergence of the model across real estate, private equity, and hedge funds as alternatives are increasingly accepted by DC plans,” says Foster. “I do see the space becoming successful again in a DC world.

“Defined contribution plans don’t [currently] lend themselves to private funds,” he adds, noting the need for daily valuations and a dislike of illiquidity. “They need help picking real estate funds.”

Foster is leaving Franklin Templeton after almost 30 years, during which time he built the firm’s Real Asset Advisors fund-of-funds platform and established the Global Real Estate Securities group. “Franklin is a wonderful place, and I’ll never forget my time there, but I’m really excited about what I see out there,” he says.

Foster notes several trends in the real estate investment management business, not least the move by GPs to diversify their revenue by expanding into core, and the challenge of sharing economics between core acquisition teams and those on the value-added and opportunistic side, who typically get paid more.

But he says real estate remains fundamentally attractive today compared to other asset classes, thanks to its “relative inefficiency. It doesn’t move [in value] every day like stocks and bonds, and there’s no other asset class where a transaction fails because the seller doesn’t like the buyer. That happens a lot in real estate, and those frictions create unique opportunities.”

With new supply largely below historic averages, Foster says LPs should continue to “allocate to real estate but ask themselves the question: Which point in the cycle do you not want to get in at? It’s not an easy question for investors to answer, because it depends on the returns they’re looking for, but you can still find places to invest today that make a lot of sense.”