Which Funds/Firms Are Ticking Time Bombs?
I just wasted my time doing two rounds with a firm that will probably barely get a ~1.0x equity multiple on their last two funds, let alone payout carry. I imagine fundraising will be extra challenging.
Any other firms come to mind that are seemingly doing well but could be in trouble in the near term?
I think you'll be shocked at how easy it is to raise money for a second/third/etc fund. Equity allocators and the people who invest in those funds are actually not particularly interested in returns, they're just risk-averse. Re-upping in a known quantity, even one which didn't do all that well, is always going to be an easier sell than a newcomer.
I'd counter this, allocators absolutely care about returns, but in context. If the last vintage returned 1% but ODCE was negative 4%, where else are you going to go? We're all at the mercy of the market, particularly at the scale allocators are deploying at - that scale, you're just looking to index the market, market+100bps if they're lucky.
I would argue that a fund which does not beat the market, should die off and be replaced by a newcomer. That isn't how the world works, of course, but it should be.
I just think it's so lazy and dishonest to make this "we're at the mercy of the market" argument. No shit. You get paid to do better than the market. What in the world justifies the fat salaries and fees you charge if you're just gonna throw up your hands and say "well, it's the market!"
This attitude is endemic among brokers, by the way. When times are bad, it's "the market" and when times are good, it's them. If you aren't going to own up to your own incompetence when the rest of the world is also doing poorly, then you don't get to claim credit when you do well. Good operators thrive in all conditions.
Highly highly disagree. Equity allocators would just choose not to re-up with a subpar fund. They’ll just throw more money at the megafunds. Look at how certain firms are struggling with capital (ex: HIG) and yet, STWD, BX, KKR, etc. are still pulling in major commitments.
Are those megafunds actually doing better than anyone else? I am asking honestly, I don't know and I don't know where to look for that data. I can see a world in which you are merely reinforcing my argument - that even mediocre performance is find as long as you have a household name.
Moreover, there are plenty of smaller funds which target different strategies and returns. Plenty of operators, too. This site is full of threads about how some of these syndicators manage to pull in commitment after commitment despite the business plan being dogshit, the assumptions borderline fraudulent, and the track record absolutely abysmal. And not all of the investors are greedy rubes coming in through TikTok. Sophisticated players are investing in some of these firms, which makes no sense unless you concede that the motivation is something other than maximizing returns.
Once you understand that equity gets allocated by people, and not some ideal of maximizing returns, this all makes more sense. Someone who sits in a cushy seat at a REPE doesn't want to take a risk to make a huge return; they want to take as little risk as possible so they can continue to draw their nice paycheck and their all-but-guaranteed bonuses. Giving money to a known quantity means being able to hide behind qualitative factors like their "track record" and being part of a herd mentality means you never make a glaring mistake.
I'd say Ozy is right to an extent. Risk-averse is a big deal especially for the institutional side such as pension funds. If you look at RE allocations for large pension funds, the returns generated for that side are extremely weak. The biggest issue is the pension fund managers dont want to take a chance on the new guy on the block because if he blows up, then theyre going to have to answer to the teachers/firefighters, etc. It becomes a big black mark.
At least for office, big funds will do okay - basically any fund in the past 5 years that had significant office exposure got wrecked. It’s more understandable. It’s the operators who fucked up that will cease to exist. Good luck getting an equity partner again when you went under on 5+ deals.
However there are still a handful of funds, and REITs that are going away, although that should be pretty clear by now so it won’t be hard to detect. And they definitely aren’t hiring.
Shorenstein has at least 5 deals go under and they are still relatively strong on fundraising.
Montana Ave
Go on……
Didn't those dudes hit several home runs last cycle? I think they're just fine... Maybe beat up outside markets I covered.
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