What better way to spend November 2 than in Chicago with the enthusiasm of the Cubs winning game 6 the night before the conference and the historic World Series win that night. I was in the windy city for Privcap Game Change conference for real estate in 2016.
The conference was largely focused on real estate industry trends and markets. That is outside of my expertise and are topics that I do not address in my stories. I’m sharing a few of those notes, but I don’t necessarily endorse them and my firm does not necessarily endorse them.
I spoke on a panel on GP Operations in the Age of SEC Compliance. We repeated the session twice for rotating breakout sessions. There was quite a lot of discussion about the pros and cons of registering with the SEC as an investment adviser. One attendee earlier in the day remembered a time in the 1980s when an SEC office kicked out the real estate advisers from registration. Investors had asked them to register. The SEC told them not to.
That is the driving force for real estate fund managers to register today: investor expectations. Real estate funds are in a gray area of the registration requirement. Congress used a odd definition to define “private funds.” There appear to be fund managers getting advice letters from their law firms that they are not subject to registration.
There was a lot of talk about the fee cases being brought by the SEC against fund managers. I pointed out that those cases are independent of registration. The SEC cases are based on the anti-fraud provisions (section 206) that are not limited to registered investment advisers.
The opening session of the conference was peering into the crystal ball and prognosticating on the near future for real estate. Is a recession coming? How defensive should your investing be? The last real estate slump was caused by debt run amok and before that oversupply. Fundamentals are still pretty good in most sectors and most markets. Low interests have a big effect and there is uncertainty about when and how quickly interest rates may rise. Our current stage of global central bank policy is in uncharted territory: long period of low interest rates, negative interest rates, running out of debt to buy.
The second session focused on changes to the industrial sector, in particular the light industrial sector with the Fourth Industrial Revolution.
The First Industrial Revolution used water and steam power to mechanize production. The Second used electric power to create mass production. The Third used electronics and information technology to automate production. Now a Fourth Industrial Revolution is building on the Third, the digital revolution that has been occurring since the middle of the last century. It is characterized by a fusion of technologies that is blurring the lines between the physical, digital, and biological spheres.
One focus is the “last mile” of e-commerce. These are new users in the space. They need more light industrial space than bricks and mortar retailers. Faster delivery times means more e-commerce facilities close to more population centers. The facilities have much more automation than traditional warehouses.
The third panel focused on what private real estate investment managers can learn from public market REITs. They do have a correlation with the broader market trends. That may change now that REITs have been split off from the financial sector to their own sector. REITs have more volatility than private real estate in part because the private side marks values only quarterly.
A session on LP-GP relations noted that real estate allocations were down in 2015. The biggest fund managers are taking the bulk of the allocations. Some things that are “no-go” from an LP’s perspective are the lack of key man provisions, devotion of time and deal-by-deal waterfalls. Look at other relationships with LPs to see if it an inducement to take other actions that may not be beneficial to the main fund.