Contemplation of PERE.

In the 23 years I have been CEO of Moorfield we have shape-shifted from public company to private company to private equity fund manager. We have also moved between the real estate asset classes, due primarily to the fundamental driver of supply versus demand but also taking account of; (i) economic and sector cyclicality, and/or (ii) our recognition of an emerging asset class or the material disruption to an existing one. Through all of this exhilarating, self-imposed corporate and asset revolution we have always operated under the private equity investment model, as that has been our ‘raison d’etre’.

Moorfield operates under an investment and asset management structure that allows us to be a fully vertically integrated asset manager to the assets invested in, but we are also a capital allocator using strategic outsourcing with proven operational/development partners - with our highly informed oversight and rigorous control on the business plan implementation. So we are always on the lookout for good partners.

Over these last 23 years Moorfield has invested in the Traditional real estate asset classes (retail/office/industrial) and in many of the Alternative real estate asset classes (Student/BTR/Retirement/Hotels/Hostels/Pubs/Residential/Car parks). We have been a pioneer of UK investment in student accommodation (Domain), limited service hotels (Kew Green), BTR (More.), retirement living (Audley) and logistics (MLP). We were also one of the first to focus on Regional Offices post the global financial crisis (MREFII/MREFIII), where we were able to achieve above target returns. Moorfield’s investment themes are currently almost exclusively based on the undersupply caused by needs and demand driven societal shifts seen most clearly in the Alternative real estate asset classes – and indeed this has been our focus for the last few years.

You can see from the above commentary that we are continually exploring the optimal position for Moorfield. One of the benefits of being a smaller company is that change has material impact on results for all stakeholders in Moorfield and its funds. This year has been no different and we have been exploring what the future may hold considering the political challenges the UK continues to face and also the shifting nature of the private equity real estate industry. PERE is no longer solely the domain of opportunistic and value-add funds, as it substantially was at the outset 25 years ago, but now includes core-plus and core i.e. more ‘institutional’ in the offering, meaning lower cost capital, lower risk and hence acceptably lower returns. In fact, the reality is that this PERE product extension is directly competing with what has historically been offered by Institutional real estate fund management. Fortunately, there is plenty of room for both investor types (and others!) in the market – even if it results in there being similar products competing at the lower risk end of the investment return spectrum.

My view on this PERE evolution is that the emergence of a spectrum of risk/return funds within a PERE fund manager is good for both the fund manager and the investor/LP. I value the efficiency of it for all involved – the LP can choose from a number of risk/return profiles and the fund manager can enable its origination team to be much more effective and efficient in the investment opportunities originated i.e. good real estate investment opportunities are likely to find a risk/return based home rather than the waste bin.

Another important strategic consideration, allied to the above risk/return range, is around the territory and asset class covered by a fund. If all a GP manages is a Country specific fund or a very narrowly defined (re asset class) fund, there can be concern from the LPs over the investment behaviour of the GP when the Country or asset class risk moves out of balance with the returns expected. We know what the appropriate GP response from this should be of course, but can the GP really afford to behave accordingly if that is its life blood? To mitigate this concern, as much as possible, my belief has always been that it is best to have either; (i) an appropriately broad asset class range in a relatively narrow territory, or (ii) a wider territory in which to invest in a narrower asset class range. As such, I don’t believe in trying to be an expert in multiple asset classes across multiple territories, unless the size of the fund manager enables what is essentially multiple funds with multiple strategies – each with their own appropriately incentivised specialist team – thereby effectively enabling (i) & (ii) above to be achieved under the same roof. Moorfield has chosen in the past to be (i) above, with my mantra being my desire to remain the special forces of PERE investment in the UK with researched and focused investment themes and not attempt to be the army with multiple battalions on multiple fronts.

Relevant also is fund size. LPs are generally looking to reduce the number of GPs they invest with, but this coincides with the amount of capital to be allocated to GPs materially increasing. As a result, the big GPs are getting bigger and their offerings are getting broader. As I have said above, the breadth of offering is something I support if there is appropriate GP/LP alignment and incentivization, but logic would tell you that the larger the funds under management become the greater the need to originate investable deal flow and the larger those deals are likely to be – and I question whether this scale is in the best interests of the investor….? Time will tell.