FEATURE: West not best

A preference in Asia for domestic talent over expatriates is one of several key takeaways from PERE’s examination of recruitment and compensation in the private equity real estate sector. PERE Magazine November 2011 issue.

There are numerous reasons why a private equity real estate professional might be attracted to relocating to Asia from Europe or the US. The region’s sustained growth trajectory, its more attractive tax exposures and escape from the paralytic European and US economies – all make working in the Far East increasingly attractive.

While Asia might seem inviting these days, opportunities at private equity real estate platforms in the region are not as forthcoming as one might imagine, according to Will Harrington, principal at Capstone Recruitment Group, a Hong Kong-based recruitment consultancy. “We need to educate people as to why that is,” he tells PERE, explaining that the prevailing preference among private equity real estate firms is a localised workforce. Even the most established international firms, traditionally hotbeds for intercontinental movement, are willing these days to sacrifice experience – and sometimes even accreditation – for a native workforce.

Harrington offers a hypothetical, but nonetheless typical, scenario: “We get candidates with 15 years of experience in institutional investment with large private equity real estate groups wanting to come over. Our line to those guys, however, is that firms often prefer to go for someone who is Chinese with only three years of experience.” While a marked difference in salaries plays its part – the experienced Western candidate could well be seeking $250,000 to the less-experienced Chinese candidate’s $70,000 – he says firms are realising the benefits afforded by hiring local talent able to engage more naturally with local cultures, governments and, crucially, business practices.

The majority of the approximately 30 candidates Harrington has placed this year have been at the junior level, typically analysts or associates. He notes that most Hong Kong private equity real estate firms focused on China, for example, place fluent Mandarin and origin from a city in which the firm wants to invest high on its list of requirements. “Most of the private equity groups, whether from an operational level, an investment level or an asset management level, want local talent,” he adds. Unsurprisingly, the pay gap between Western and Eastern candidates of similar experience is narrowing as a result.

A no-fly zone

Harrington singles out RREEF, the real estate investment management business of Deutsche Bank, as a perfect example of a firm that has evolved from operating with a significantly international bench to become a more local platform. “The guys that invest for their separate accounts in China, for example, are all going to be Chinese,” he says. “That’s the mentality we’re seeing, and it’s definitely flowing through the market at all levels.”

Niel Thassim, head of RREEF in Asia Pacific, corroborates Harrington’s message. He tells PERE: “It is clear across the entire industry – and has been proven consistently over the years – that teams with local professionals consistently have outperformed those with a ‘fly-in/fly-out’ approach to investing.” He notes that is particularly true in Asia, given the diverse and complex nature of its markets and the region’s various languages, cultures and relationship considerations.

While Thassim concurs that locals are more than challenging expatriates for positions, he disagrees that domestic staff are playing catch-up on the skills front. “I would certainly challenge the presumption that ex-pats are any more technically skilled at transacting and underwriting risk in a local Asian market as compared to a local real estate professional who has been doing it his or her entire career,” he says.

That said, Thassim believes a healthy combination of local investment professionals, coupled with what he terms ‘global best practice investment processes’ and a ‘research and risk management framework’, provides the best of both worlds. “That is what we have implemented,” he adds.

It is clear across the entire industry – and has been proven consistently over the years – that teams with local professionals consistently have outperformed those with a ‘fly-in/fly-out’ approach to investing
Niel Thassim, RREEF

Thassim says the need to evolve from the ‘fly-in, fly-out’ approach rings true on the capital-raising front as well. RREEF has been particularly active of late in securing more than $3 billion in big tickets from Asian investors, including separate accounts from investors such as Korea’s largest insurance broker, Samsung Life Insurance, and Malaysia’s Employees Provident Fund and KWAP Provident/Pension Fund. “We have certainly experienced that our Asian clients appreciate and value having our local professionals who talk their language, understand their culture and are with them every day, rather than seeing an ex-pat fly in once every month or two from Hong Kong, Singapore or London,” he adds.

The rise of the local within the private equity real estate sector in Asia has meant their compensation has increased by an estimated 25 percent to 30 percent per year for investment and asset managers alike. Harrington says: “We expect that to be regulated a little over the coming 18 months, but it’s about simple supply and demand. Firms have to pay to poach quality.”

Tough in the middle

While Asians can feel relatively bullish about their employment prospects, their European counterparts are feeling less certain. Andrew Wilson, managing director at Redset, a London-based recruitment consultancy, feels the macroeconomic paralysis in Europe over the summer has made it tricky to confidently determine employment and compensation trends in the region. “It’s all up in the air right now,” he says. “People just don’t know what will happen with the Euro and whether there will be an orderly resolution or not.”

Wilson’s firm, which focuses primarily on the UK and Germany, placed 35 people this year across the seniority spectrum, but he concedes that most of those came before the summer. He, like everyone else, is waiting to see how the Continent’s troubles untangle before he confidently peers into his crystal ball again.

In the first half of the year, Wilson recorded a gradual increase in private equity real estate compensation levels as private fund managers “kept pace” with banking salaries. Like Harrington in Asia, Wilson found the going relatively easy placing juniors, but he also has placed some department heads as well. The tricky area for him has been in the middle levels, senior associates to junior directors.

“These are the guys who typically reflect the execution horsepower of a business,” Wilson explains. “When things are charging along, managing directors need trusted staff to manage the process. When things aren’t and you’re not doing hundreds of deals, however, they are not needed.” On a cost basis, the middle-men are the first to go, he adds.

That is one reason why Europeans have placed a fiercer than usual emphasis on job security, alongside what their basic pay and bonuses might look like. Consequently, pure private equity real estate firms are losing out on prospective new hires, particularly on the acquisitions side, to platforms that run funds for a wider range of risk-return strategies than just opportunistic, Wilson notes.

“It’s about finding a platform with capital, but it’s also about finding a platform actually able to do deals,” Wilson says. Acknowledging that greater spoils come for those deploying higher return capital, people are far happier these days just to know their job will still exist in 18 months time. “People who a few years ago wouldn’t have touched a core-plus fund are actually now more interested in them,” he says. The ideal platform is one that can do opportunistic deals as well as have access to other capital pools so it can look at whatever deals are relevant to the current market.

Indeed, PERE increasingly is reporting on traditionally opportunistic investment firms increasing their offering to include lower-risk investment products. One example is MGPA, the Europe- and Asia-focused firm, which last month came to market with a €500 million core-plus fund aimed at offering exposure to Asian real estate to German investors.

What does that backdrop mean for compensation negotiations? “The pendulum of power is right in the middle,” says Wilson. In early 2008, the employee side could “pick and choose” terms, but that power has disintegrated since, compounded by the collapse of Lehman Brothers and numerous other financial and real estate-focused institutions in the wake of the global financial crisis.

“Now, we’re in a potentially good equilibrium position,” Wilson says. “There are enough candidates from whom firms can choose, but not so many that they can dictate terms. They must pay market rate, but they should get someone sensible for that.” 

Perhaps predictably, the market has been able to “weed out” those lacking talent, who previously had been supported by positive market fundamentals, and locate those with a “genuine ability to do the job,” Wilson says. “A capital-raiser who raised $500 million in 2007? Anyone could have done that,” he scoffs.

Return of the hunter

In one departure from when PERE examined the private equity real estate employment landscape last year, the need for proficient investment professionals is making a comeback. “We’re seeing a slight reversion of what we saw 18 months to two years ago, when the need was for strong asset managers and capital raisers,” Wilson says. Indeed, a good proportion of the capital raised since then has yet to be deployed, placing an onus on those able to “really originate deals.”

It seemed before that the firms had all the power, but now it seems like the candidates are getting some of that power backChris Papa, The Bachrach Grouop

Chris Papa, managing director of the real estate division at New York-based recruiter The Bachrach Group, says the majority of the seven placements he has led this year have been for investing jobs, as US platforms have actively been deepening their bench to best take advantage of the country’s window of market distress. Indeed, according to PERE’s Capital Watch figures from October, more than $12 billion of the $29 billion in equity raised for value-added and opportunistic investments this year is targeting the US. He describes opportunity funds stateside as “ramping up” their hiring activities to mirror this fundraising flow.

Nonetheless, it is clear that an onus on asset management in the US over the past couple of years has been reflected in pay packets. John Peters, president of New York-based Peters & Associates, says: “A trend we are observing from some newer firms is to shrink the spread between acquisitions and asset management, which at the extreme can be as much as 75 percent. The more experienced founders recognise that most often these spreads end up being unwarranted and tend to inappropriately create a senior and junior class of performers.”

In general, Peters and Papa agree that pay among US private equity real estate firms is gradually increasing. “To recruit today will require at least the 2011 numbers or maybe more, depending on the recruiting requirements and preferences,” Peters adds.

In terms of a correlation between the US economy and the hiring scene, Papa sees a healthier picture, unlike in Europe. “What I read is a lot worse than what I’m experiencing,” he says, adding that is reflected in compensation negotiations between employers and employees. “It seemed before that the firms had all the power, but now it seems like the candidates are getting some of that power back.” As a result, salaries are up.

Overall, the outlook for private equity real estate employment varies, depending upon the region. At the junior end, where much activity is found these days, prospects look relatively brighter for the US professional than they do for his European counterpart. However, if either fancies a crack at Asia, take heed: the region requires expatriate services less and less.