Big funds are getting bigger. Take the latest news about behemoth fund manager Blackstone. According to Bloomberg, the target for Blackstone´s latest global property fund is USD 15 billion. Furthermore, PERE’s Global Investor 30 from last November stated that the top 30 global real estate investors had invested at least $10 billion in 2014 compared to just USD 1blnin 2013. PERE´s prediction: This elevated investment activity by the “institutional elite” will “make it harder for the next tier to catch up.”
But what does “catching up” imply? And is it a good thing?
The implication is that if you are not part of the large, institutional Global 30 investor elite, then you are seriously disadvantaged, and that scale is required in order to compete and succeed in the investment universe.
But this thinking is incorrect. Growth and size are relevant only as they pertain to the underlying opportunity set.
At the moment, funds are getting bigger not necessarily because the underlying opportunity set is expanding, but because the world is awash with cash and needs somewhere to put it. Because large investors need to move large amounts of capital, they do not have the luxury of time to scour the market for niche operators (nor are small, niche operators structured to be able to accept large pools of capital from single investors), so the capital gets allocated to the larger operators who, by default, become even larger.
As the operators become larger, they are forced to pursue macro-based strategies where they can move large sums of money. Pursuing a macro strategy requires large amounts of capital and confidence that the overall market will move in your favour. This is the opposite of a micro strategy, which involves investing in single asset or small portfolios in a focused segment of the market, with opportunities identified on a bottom up basis. At ASG, this micro strategy further means taking assets that are undervalued or in need of repositioning and transforming them into stabilized assets. This approach is more management intensive and requires a more acute understanding of the local market, but is less dependent on the larger macro trends occurring.
It is this focused micro strategy approach that has enabled ASG to make opportunistic style returns in a low to no growth market like Germany. Considering our first five office investments Goldpunkt, Grammophon, Main Michelangelo, AOC and G1 – these mid-sized office buildings in major German cities have all sold in the past two years for above average market returns and above market yields while German GDP growth has been on life support at less than 1% and prime office yields continue to drop (below 5%). On an individual asset return basis, this would not have been achievable with a macro strategy, nor without an indepth understanding of the respective local markets.
Of course, as ASG has grown (from €56.3 million in Fund I, €248.5 million in Fund II and €380 million in Fund III), our investments have become slightly bigger and our strategy has expanded to include lending and residential and most recently, corporate acquisitions. However, the underlying investment ethos – a niche, focused micro-style investment approach – has remained the same.
Furthermore, not constrained by the need to deploy excess amounts of capital, we can take a more disciplined approach to analysing opportunities; i.e. we can patiently wait to cherry pick the best ones. By staying a small organization that is not entrenched by bureaucratic processes, we can make decisions quickly and effectively. It is this fleetness of foot that has often given us the advantage over other buyers in getting a transaction done. And by maintaining an integrated platform where acquisitions, asset management, and fund level functions are all involved in the investment decision-making process, pursuit of a good investment opportunity starts from the prospecting stage.
There is some truth to the PERE report about the next tier of investors, just below the institutional elite, being left behind. Lacking either the gravitas needed to effectively pursue a macro strategy or the focus needed to pursue a micro-strategy, the “next tier” of investors may find themselves lost somewhere in the middle with a strategy that does not necessarily match the underlying opportunity in the market. There are, for example, only so many available and investment-worthy €200+ million office buildings in Germany, so if you are a German office focused fund with €2 billion to deploy, you will quickly find yourself either overpaying for assets or underserving your investors. Needless to say, this is not a position you want to find yourself in.
In the case of the growth of funds, or of any business, for that matter, Goldilocks had it wrong; it’s best to be big or to be small, or better put, to match your size and strategy so that it’s “just right” for the opportunity. For ASG, this means staying nimble and focused, and not growing just to “keep up” with the rest.