This time two years ago we were all at home in quarantine waiting for our home office monitor deliveries on backorder. I remember thinking about tossing all of my suits and heels since ostensibly we'd never be back to the office or at in-person corporate events again.
Flash forward and the suits, heels, and corporate events are back with a vengeance in the fall conference season. Last week, I had the pleasure of attending not one, but two global conferences with 500+ attendees, countless coffees, lunches, happy hours, and dinners with my esteemed investment management colleagues from around the world.
The two events: Private Equity International (PEI) Operating Partners Forum and Pension Real Estate Association (PREA) Institutional Investor Conference. Seemingly unrelated groups of savvy investors with one goal: Share best practices around executing underwritten Value Creation Plans (VCPs) for portfolios.
After two decades of falling interest rates and rising prices, the investment industry is being asked to show its value creation mettle. Rather than riding the tide of climbing multiples and falling cap rates, firms are having to fall back to fundamentals to maintain returns.
Over the past five years, multiple expansions accounted for 56 percent of value creation in Private Equity deals and a similar % of value added to the average real estate investment portfolio was based on cap rate compression [according to CEPRES Market Intelligence].
With this shift in mind, the topics de jour were almost identical, albeit with different applications: PEI is executing VCPs for portfolio companies and PREA Investment Managers (IMs) are generating value from real estate portfolios. In panels and conversations over passed hors d'oeuvres this week three key themes repeated, although the topic of almost every session was applicable to both sets of attendees. This made it impossible not to draw parallels (and perpendiculars) between the operational playbooks of corporate and real estate investment communities and begs the question: could best practices for both be combined to create a universally accepted Investment Management Owners Manual?....
Both events kicked off with stale donuts and opening statements about the macroeconomic outlook. Factors like interest rates, inflation, and availability of capital are germane to both groups with obvious implications but macro socioeconomic trends are also driving strategy in different ways. For example, take the statistic:
The % of 25-35 year old's living at home is the highest in 75 years. [PEW Research Center]
Both groups are reacting to this statistic urgently. Real Estate allocators are channeling rental property investment from multi-family (the traditional stepping stone for millennials after mom and dad's basement) to single-family build-to-rent (the next stepping stone in the typical housing progression). PE strategists are capitalizing on this trend by designing consumer goods platforms targeting Millennials with more discretionary spending in the absence of rent or mortgage payments. The common denominator: Agility. In order to capture these types of targeted opportunities quickly, the ability to collect, organize, and analyze vast amounts of data is paramount. There we have theme #1: Leveraging Data Analytics.
Not surprisingly, the notoriously fast-paced PE community is a few yards ahead of the slower-moving institutional real estate behemoths with advanced analytics. In some cases, funds are already on the 2.0 version of modern tools and techniques. "Getting out of Excel" is easier said than done but funds and their portfolio companies are making great strides in adopting data and technology infrastructure that can accelerate and automate information workflow to produce dashboards in BI and Tableau for real-time decision support.
In a PEI session entitled "Leveraging Technology and Data to Unlock Value," one of the panelists described their strategy of mapping all portfolio company data to a unified data layer to avoid customization and building dashboards on top of that. He bemoaned the expense and time it takes to tailor bespoke data models for individual investments, especially when executing a bolt-on strategy that engenders constant integration of financial and operational data for acquired companies. Instead, his team uses the same portfolio of technologies with one data repository to meet reporting/analytic requirements for both sponsors and portfolio company CEOs. One tool to house data, a single roster of ERP, HCM, and other back office technologies, and a single tool for Business Analytics. And that's just speaking to the operational use case for data strategy. The panel agreed that leveraging analytics for deal sourcing and due diligence has also become table stakes to remain competitive.
Real estate on the other hand hasn't fully realized the potential that analytic tools offer. The infinite amount of data in this sector, both external (market data) and internal (historical performance data/trends), remains largely unharnessed. Cause/effect relationships and historical performance trend analysis that would be powerful to focus investment strategy are difficult to aggregate. A few reasons for this:
- Legacy Providers - Prevailing real estate software tools like Argus are based on a "black box" architecture that holds hostage the data that might be stored in a modular database and analyzed more dynamically and updated more frequently. Furthermore, it is not integrated with portfolio-level and fund-level accounting and reporting workflows.
- KPIs - Unlike in PE where a single set of KPIs demonstrates performance for a platform of companies with a common profile, a typical real estate fund invests across a variety of property types and KPIs are unique across asset classes, creating consolidation complexity. Also mentioned at PREA was that the line is blurring between real estate and corporate metrics with the inclusion of investments in proptech and life sciences.
- Investment Stratification - There are multiple layers of performance management up the investment vertical from "dirt" to fund. Capex projects at the property level, valuations at the asset level, cash flow and IRR at the portfolio level, and Earnings Multiple at the fund level. Each layer has its own third-party servicers/administrators, reporting structure, and areas of focus that align with the end goal of profitability but have sub-metrics that vary.
- Deal Complexity - In addition to the debt/equity bifurcation, investment vehicles are diverse and waterfall proformas bespoke depending on the JV, intermediary, direct investment, or closed/open-ended structure. Different parties consolidate different taxonomies of data that may or may not be manipulated to divergent sources of truth based on the end user.
When exchanging ideas after hours at PREA, a senior fund management leader at The Carlyle Group made it clear that "the [real estate] fund is prioritizing investment in its performance management operations but nobody on our team has demonstrated an ability to untangle the data web across archaic technologies." What followed was a conversation about how corporate PE peers have navigated similar hurdles and pushed through to results and the long-term lift that rigor provides for those Fund Management teams. It can be done and it's worth the effort. Even in the current environment where we are dusting off the cost-take-out playbook, there is unanimous consent in both the PEI and PREA communities that technology will be increasingly seen as a necessary upgrade across all sectors.
This brings us to a related but separate theme #2: ROI of Technology Investment in a Downturn...
Stay tuned for Part II.
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