How To Get LP Capital as an Emerging Manager

Managers and operators that are just starting out too often overlook their back office functions in the search for LP capital, say experts from Oak Street RE Capital and Belay Investment Group.

It’s tough for emerging private equity real estate managers to get a leg up, but one often overlooked differentiator critical to securing LP capital is ramping up the back office in preparation for the needs of institutional capital partners.

The fundraising market for private real estate improved in 2015, with more than 177 funds closing on $107B of capital in 2015, according to data provider Preqin, but for Larissa Herzceg, managing partner and CIO of Oak Street Real Estate Capital, the uptick in allocations isn’t necessarily benefiting first and second time funds.

“Many larger investors are focused on scaling back the number of relationships in their portfolio and this benefits the mega-firms and is disadvantageous for the newer groups,” says Herczeg.     

Institutions have different motivations—there’s no one size fits all, says Eliza Bailey, managing principal at multimanager Belay Investment Group, which works with and mentors operators and emerging managers making the step up to fund investment managers.

Growing shops build their experience working with stakeholders, but it’s a “big jump from working as an asset manager or with high-net-worth [HNW] clients to managing a fund in terms of alignment of interest and business operations,” says Bailey. “HNWs are generally cash- and cash-on-cash focused while institutions are total-return driven, along with [having] a focus on time-weighted return or IRRs.”

Adding in-house staffing and expertise upfront can be one of the best solutions to prepare for institutional demand.

“If you want to be an institutional firm with a fund structure, I firmly believe developing a back-office sooner rather than later is important and valuable,” says Herczeg. “It is certainly a cost-benefit analysis for each manager.”

For those who have not built out their teams, taking a top-down approach should be at the top of the to-do list, adds Bailey. Many smaller firms don’t have a CFO with the proper education and skill set in terms of policy and procedure, she says. Teams can’t “just use an analyst or someone on staff to do it, which many do” and need to hire a dedicated CFO.

Many operators have built their platform on proprietary data and tight regional analysis that might not easily be integrated with third-party vendors. “A lot of operators create databases they have tracked for 10 years or more. They have the data in place, [but they often] haven’t put it in an output that an institution needs,” Bailey says.