Operational Focus: Quality Marketing Makes All the Difference in a Crowded Field
The following was distributed as part of the Real Estate Private Equity Fund - First Quarter, 2014 newsletter.
The enthusiasm by institutional investors for real estate as an asset class—reinforced by repeated asset rebalancing due to a rising stock market—has brought about a predictable boom in the number of new real estate funds that have been created to serve investor demand. Seen from a high level, more investment dollars and more funds is a recipe for a vibrant market. At the level of the individual fund or investor, however, the sheer growth in the number of players can be daunting, as investors confront a potentially confusing array of options and funds struggle to rise above the crowd. This challenge can be particularly acute in certain niches: Consider that more than half of the 309 North America-focused funds currently in the market have targets of $250 million or less, making for an especially crowded field at a time when investors are looking for more opportunities in Europe.
“When the market was smaller, funds and investors could rely on their Rolodexes and relationships to drive their matchmaking. That strategy, however, doesn’t scale to the current environment,” said Jason Burian, who leads the Chicago activities of CohnReznick’s Commerical Real Estate Practice. “There are now 645 funds in the market—a 10% increase from the end of 2013. Both funds and investors need to adopt new capabilities and in some instances, new strategies.”
On the fund side, there needs to be a careful audit of marketing and communications strategies. A Preqin survey conducted last August found that investors are often frustrated with the quality of marketing materials they receive from funds. Common complaints include exaggerating the fund manager’s track record, being unclear about terms and conditions of the fund, and not providing the information necessary for potential investors to adequately evaluate the fund against other options. These shortcomings become all the more glaring when investors are having to use the information to make their choices from a greater number of possibilities. And greater overall investor emphasis on transparency and accountability further increases expectations regarding communication.
“New funds in particular are prone to the misconception that marketing is a non-core function that can be easily outsourced,” Burian observed. While it is true that many third-party fund administrators can handle a fund’s marketing along with the other support services they offer, outsourcing should be viewed as a temporary marketing fix for two reasons. First, no one can tell a fund’s story better than its own leadership. Second, the ongoing process of articulating and refining the fund’s value proposition is a discipline that clarifies the execution of investment strategy. This is why most successful, established funds also have robust in-house marketing teams. One new fund we work with understands this with admirable clarity: Having launched an initial small fund, it is now embarking on a larger national fund—and plans to start bringing its marketing in-house within the next six months. (Note that recruiting, growing, and maintaining a solid marketing team during a time of heightened competition will require a strong human resources capability as well.)
The need to clearly and compellingly communicate isn’t just an issue for new funds. As established funds launch new offerings with higher targets, they need to reach beyond the “usual suspects” in doing the raise. This can mean reaching out not just to new investors, but to new categories of investors that may have different perspectives and goals than the fund’s traditional audience.
Investors are having to change their approach as well, becoming more active in how they survey the fund market. The Preqin survey noted that 51% of the investors it surveyed had built internal analysis capabilities to proactively evaluate investment possibilities, and noted a decreased reliance on letting placement agents or fund managers initiate contact. Many investors have also launched or expanded “emerging manager” programs to help them identify lean, fast-moving funds led by rising stars.
But if investors have to work harder to make sure they are making the best fund choices for their objectives, it is still a buyer’s market—the onus falls on the funds to clearly articulate their case to an audience that is paid to be skeptical.
For more information, please contact Jason Burian, Partner, at 312-508-5935.
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