Fund terms are changing(2)

Private equity real estate GPs are ‘reluctantly’ beginning to change the terms of their funds as the capital fundraising market swings increasingly in favor of LPs, according to institutional investors at the PREA conference.

Real estate fund managers are beginning to negotiate the terms of their private equity vehicles, according to LPs at the Pension Real Estate Association (PREA) conference in Chicago today.

As institutional investors struggle with the denominator effect and fund managers face a tougher fundraising environment, LPs say terms, such as fees and preferred returns, are coming under fiercer scrutiny.

Speaking at the fall conference, Eric Lang, director of real estate assets at the Texas Teachers Retirement System, said: “It’s early but yes terms have changed.”

He added it wasn’t just financial terms that needed to be negotiated but also terms relating to the structure of funds, adding LPs had to consider the possibility of GPs going bankrupt with such turbulent market conditions.

Robert Schau, director of real estate investment at UTIMCO, told PERE following the panel that the pendulum had swung more in favor of LPs following the credit crisis. He said GPs were responding by negotiating fund terms albeit “reluctantly.”

With the current turmoil in the credit markets significantly impacting on real estate allocations, LPs advised fund managers to take a more patient approach in terms of capital raising and investing dry powder. “There are a lot of unknowns in this market. It’s time to not be in a rush to do anything, we just need to have patience,” Lang said during the panel.