In the aftermath of the sub-prime mortgage and real estate debacle, institutional investors are rethinking their real estate investment allocations. Instead of allocating along traditional index-oriented lines, these investors are looking for value-added holdings that can positively impact portfolio performance (i.e., excess alpha). We believe real estate emerging managers (Emerging Managers) can be that source of improved portfolio performance. We define Emerging Managers as any fund management, investment management or asset management firm that is typically excluded from traditional search processes for institutional investors and plan sponsors across all asset classes regardless of their ownership structure or size.
Earlier this month, Institutional Investor reported that TerraCap Management Corp. (TerraCap), an Emerging Manager, has seen institutional interest accelerate in its distressed commercial real estate strategy, as it nears the close of its second fund. The Bonita Springs, Florida firm has received allocations from the University of Florida endowment, Holyoke (MA) Retirement System and a number of other institutional investors and family offices. According to a November 2012 article in Real Estate Alert, Terra raised their $25.7 million first fund in 2010. It was reported that this fund has earned over 30% annualized return on investment.
TerraCap is an excellent example of an Emerging Manager that has tapped into markets in which large institutional real estate firms do not generally participate.
- Smaller sized investments. Commercial properties that are too small ($2 million to $15 million) for branded firms, but larger than investments local investors can handle.
- Off-Market Deals. Off-market, or private, deals reduce competition from better capitalized buyers.
- Specialized Markets Requiring Local Knowledge and Focus. Distressed and foreclosed properties require value-added activity utilizing specialized knowledge and time consuming focus. In the case of TerraCap, taking advantage of international and domestic immigration trends in the region.
Access to Emerging Managers and their potential excess alpha can be unlocked through direct investments in comingled funds or separate accounts managed by these firms recognizing that those investments can be made through either a fund of funds or a manager of manager platform. Direct investment, particularly with local Emerging Managers, has the benefit of engaging with the local economy.
In conclusion, Emerging Managers have a role to play in the portfolios of sophisticated institutional real estate investors who are able, and willing, to invest outside the typical index-oriented structure.
Lessons Learned: Emerging manager shouldn't be ignored.
James A. Casselberry, Jr.
Senior Managing Director
NexTier Companies, LLC