We’re living through a series of sea-change events that are impacting our world. For private-market asset managers looking to stay on top of their game, there’s a lot more to think about — and worry about — today than even five years ago.
What do these converging events portend for the industry? What are the issues and data points we should be looking at? To find out, we recently sat down with two thinkers who have their fingers on the pulse of private markets. They shared some of key insights into trends and issues driving this dynamic market. ____________________________________________________________________________________ _________________ As CEO & Executive Director of Real Estate Limited Partner Institute (RELPI), Jonathan Schein has drawn on his lifelong skills as entrepreneur, communicator, networker, and thought leader to create a globally connected community of best-in-class organizations and people — pension funds, endowments, foundations, asset managers, family offices, and more — devoted to sharing best practices in real estate asset allocation and investment.
As Head of Markets and Client Relationships for MUFG Investor Services, Scott Ramsey helps his portfolio of private-market and pension-fund clients build and maintain success by optimizing every aspect of their fund administration — with wide-ranging solutions tailored to their unique needs, backed by the resources of the world’s fifth-largest financial institution. ____________________________________________________________________________________ _________________ Jonathan, from your perch as CEO of RELPI, you’re talking to the market every day. What's top of mind for you right now? What should asset managers be focusing on in these tumultuous times?
JONATHAN: The war in Ukraine, obviously, is on everyone’s mind right now. It’s a profoundly disturbing moment for our world, and on top of the human tragedy, it will undoubtedly affect markets in all kinds of ways, expected and unexpected. The other megatrends roiling the markets — no surprise — are the pandemic (still!) and inflation. All of these trends are interacting in real time, along with issues like supply chain and the talent crunch, to create a sense of uncertainty for the market.
We’re still talking about COVID-19, even though it’s been two years now since it exploded in the U.S., and most of the country has dropped mask and even vaccine mandates.
JONATHAN: I know the topic has been beaten to death, but the fact is, we are still in the throes of a global pandemic. And even after COVID-19 has run its course (at least as a global health crisis), we'll actually still be “in” the pandemic — because the economic ripple effects are going to last some time.
SCOTT: And let’s not forget this is all happening against a significant backdrop: real estate as a broad asset class has been on a tear over the last 15 years. Given its well-established cyclicality, it will be interesting to see how real estate evolves and performs for the next several years.
RELPI ROUNDTABLE 2: Scott Ramsey and Jonathan Schein | FINAL (April 25, 2022) JONATHAN: Right. And I know not everyone in the industry may see it this way, but I think that when this has played out, we’ll find that “full occupancy” — even factoring in business travel and events — will mean at most 80% of the previous occupancy level. After 9/11, we were told the office (at least here in Manhattan) will never come back. It did come back — but it came back differently. So I think we need once again to be prepared for how the industry “comes back” from the pandemic. New York City has 400 million square feet of office space and moves in 2 million people a day. If that space is occupied only 80% of the time, you’re looking at 80 million square feet of office space underutilized — and 400,000 people not coming into the city — on any particular day. These are some big issues that the industry will have to take into account.
SCOTT: The irony here is that, by not commuting every day, a lot of folks — including asset managers — are recapturing hours, days and even weeks of productive time, making them more competitive than ever. And that’s in fact part of another trend: the ten-year acceleration of virtualization across many industries. The pandemic and the sudden dispersion of the workforce intensified that trend — and that, too, is impacting real estate as an asset class, especially office and commercial space.
Does that mean we could be seeing a shuffling of the deck in terms of asset classes, in your view?
SCOTT: It wouldn’t be the first time. Just consider that 20 years ago, the mix of dependable real estate sectors included retail — a situation which is obviously different today, with the democratization of capital we’ve witnessed over those two decades. The reality is that investors, in their search for yield, have more options than ever before. The number of data points and trends asset managers have to master now, compared to even five years ago, has grown exponentially.
JONATHAN: That puts the spotlight on the value of what you and your MUFG colleagues are providing, Scott. Those crucial middle- and back-office functions — fund administration, fund accounting, reporting, investor relations, compliance. In many instances, they’ve become differentiators in an incredibly tight marketplace.
SCOTT: It comes down to focusing on your core competencies as you grow — instead of focusing on hiring (and managing) more and more people to handle those kinds of back-office tasks. There’s no doubt in my mind that when we come out of this cycle, the winners are going to be those with a slimmer expense load and more enterprise agility. As it is, asset managers are having a hard time recruiting and retaining the best people. That’s another big trend to factor in.
Speaking of big trends, let’s talk about the 800-lb gorilla in the room... inflation.
JONATHAN: I think inflation, like the pandemic, is going to be with us for a while. Naturally this is a challenge for the industry, given real estate’s traditional role as a hedge. It wasn’t long ago that the asset class would throw off a 7%, 8%, 10%, 12% return — back when there was enough capital chasing enough product. Now, with a huge backlog of dry powder chasing less product, I'm hearing of deals with cap rates down to a fraction of that — with the hope that some kind of return will come from appreciation of the asset.
I see this leading to a kind of bifurcation of the market — between the name-brand giants of the asset management world and everybody else. And those “everybody else” need an edge.
RELPI ROUNDTABLE 2: Scott Ramsey and Jonathan Schein | FINAL (April 25, 2022) What kind of edge will it take for a small- to mid-size fund to go toe to toe with those multibillion- dollar-AUM brands? How do they compete?
JONATHAN: If they’re on a growth trajectory, one of two things will likely happen: They’ll either get fully funded and just keep growing on their own... or they’ll get acquired. One important issue is that a lot of managers came out of real estate, accustomed to doing things their own way — which often meant using Excel spreadsheets for calculating returns. It’s hard to imagine a state pension fund giving the green light to a manager who’s still using spreadsheets, or sending out returns as PDFs.
SCOTT: One of the many advantages we have here at MUFG is that we’re well positioned to help ambitious fund managers compete with these brands. Our institutional-grade solutions are all about enabling our clients to say yes with credibility. We've got a massive real estate / real estate debt platform, including both closed-end funds and open-end structures. As you may expect, we have countless SMAs, club deals and multicurrency-sleeve structures. We also provide lending solutions, FX services, and other associated commercial banking services. Add to that our top-notch client services team and you have offerings that demonstrate how well we know and fit our clients and the market at large.
JONATHAN: Those capabilities add an essential sense of trust, security — and expandability — to any fund. Not to mention the strategic and tactical advantages of enabling managers to move more nimbly and handle the curve balls. Because we're definitely in an era of curve balls.
Private markets by nature are good at finding opportunity in times of disruption. We seem to be in the midst of a perfect storm of disruption — pandemic, inflation, war in Europe, supply chain, etc. What opportunities should savvy fund managers be focused on?
JONATHAN: I’m thinking about industrial office space — logistics spaces like distribution hubs — because e-commerce is one macro trend that’s not going away. There’s just not enough of that space available right now, and little chance of overbuilding. If you follow the trend and look at where warehouse or industrial space is going, you’ll get a good indication of where homes are going to be, where the jobs are going to be. It used to be that the dollars would follow where people are moving — for example, the suburbs. Now you have to follow the supply chain to find where the big investments are going to go.
SCOTT: Definitely. The big-box model of buying power combined with selling power, through both direct and indirect channels, is here to stay. Industrial — and I would include not only warehouses and distribution centers but also storage, data centers, solar arrays, and last-mile logistics — has gone from a niche area to a super-hot, specialized asset class.
There’s another white-hot trend we see: life-sciences ecosystems, a highly specialized area that requires close cooperation between biotech investors, medical research institutions, and real estate companies. Unlike traditional vehicles, these funds require a sustained level of expertise and sophistication on the part of the fund manager. They’re popping up across the nation, and investors want a piece of the action. We’re helping several of our clients with these kinds of new-economy funds.
Thank you for this illuminating discussion. We look forward to more in the months to come.