Separate Accounts vs Equity Fund

Have been reading about a group that does a lot of investing through separate accounts.

My question is - how different is this from investing out of a fund structure alongside an operator? At face value, I see it as no different. You underwrite the deal the same way. You (the Equity Fund or separate account) are not operating the asset, but you still have some asset management decisions to make as you're the majority owner of the asset. 

But I'm guessing there is some nuance to this and in some cases you are very hands off. Would you still be involved in leasing decisions, refinancings, capex decisions?

For what it's worth, I saw RCLCO is hiring but I'm not talking about them. I feel like they would be a case where they are pretty hands off on the real estate. They seem more like consultants than actual underwriters. But what about a place like StepStone? I am confused by their business model and what they actually do compared to a regular REPE Fund

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Comments (13)

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  • Director in RE - Res
Jun 8, 2021 - 5:21pm

I worked at RCLCO for a stint (this was when they were first getting the fund advisory platform up and running) so I'm generally familiar with this space, but it has been a while.

For some clarity both RCLCO and Stepstone advise pension funds on what to do with their money, neither of them are going to be making asset level investment decisions and both will be very hands off. These consultants handle the pacing plans for the pension funds, recommending new managers for funds and separate accounts, and setting up the strategic focus of what the pension fund should be doing ($x in an industrial separate account, $y in the ODCE index, etc.), and providing benchmarking/attribution analysis on the performance of the Capital partners managers.

I'm less familiar with Stepstone, we work with them to get them to recommend us to their stable of clients, but I've never worked there so they may have some sort of direct investment money (Townsend does, for example), but that's not their main avenue of business.

As to your fund vs. separate account question, they're not that different. The biggest differences between funds and separate accounts are administrative and not related to the actual real estate deal. A few of the major ones are below:

1. Capital Stack - With a separate account, all of the LP capital comes from one source. Because of this, they generally have a lot more control over how the JV is structured, what approvals they have, etc. They also get lower fees, etc. compared to a commingled fund.

2. Discretion - there are some separate accounts with discretion, but generally in separate accounts you'll need to get approval from the LP on each deal. Depending on who the capital partner is, this may be a significant undertaking, or more of a check the box. At RCLCO, it entails them writing a 40-50 page report on why the deal does of doesn't meet the criteria of the separate account.

3. Exclusivity - Separate accounts tend to have much narrower exclusivity agreements than a discretionary fund. there are also provisions that if the LP declines 3 deals in a row or 4 out of 5 (this obviously varies by agreement). 

  • Associate 1 in RE - Comm
Jun 8, 2021 - 6:16pm

Very helpful.

I'm guessing the "pension fund advisory / consulting" business is pretty separate from the direct investing business.

EG stepstone has a discretionary fund for secondaries / recaps and they have bid on assets we have sold (not sure which bucket of capital but assuming this was for a separate account). I can't imagine the same people doing those deals will also be advising pension funds on which industries to allocate their capital, recommending "pacing", etc. 

Do you agree / disagree?

Also when you close a deal using a separate account, you don't provide asset management, do leasing calls with the operator, do hold / sell analyses?

  • Director in RE - Res
Jun 8, 2021 - 6:42pm

Ugh I had a response typed up and WSO's menu popped up and thought I clicked on it.

Yes, I agree in general that you won't be close to the investment professionals actually doing deals.

Your second question are you referring to the GP or the LP? 

The GP will likely be doing all of those things, the LP and their consultant will do none of them other than potentially hold sell analyses.

Jun 8, 2021 - 8:41pm

3. Exclusivity - Separate accounts tend to have much narrower exclusivity agreements than a discretionary fund. there are also provisions that if the LP declines 3 deals in a row or 4 out of 5 (this obviously varies by agreement). 

What have you seen pertaining to LP member declining deals? Or "3 deals in a row or 4 out of 5..." I don't believe you finished your thought.

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