10.05.2011
By Terry Flanagan

Fund Managers Skeptical

In the opaque private equity market, fund managers ask for alternative reporting methods for some of their alternative investments.

The market for a second opinion may be most active for private equity, real estate fund managers, whose primarily class of investments have never held a reputation for transparency.

Mortgage back securities (MBS), commercial mortgage back series (CMBS) and other obscure distressed debt deals, have been subject to scrutiny, thanks to a global financial meltdown in 2008 and 2009. But, industry experts say little has been done to improve transparency with these complicated instruments.

“We all have instincts about how we’re performing, but since the private equity real estate industry is so opaque…no can really can report values; it’s just all founded on managers self reporting to their investors,” said Jeff Giller, managing partner and chief investment officer of Clairvue Capital Partners, a real estate private equity fund manager, which focuses on indirect investments with minimal blind property risk.

“Our observation is that everyone thinks they’re kids are the best looking in class… managers think their assets are the best out there, and we find that a lot of funds’ values are reported at much higher levels than what we think truly exists,” Giller said.

Managers are not marking to market, but rather relying on a discounted cash flow (DCF) approach to value assets, according to Giller.

“You need to take everything with a grain of salt,” Giller commented, with weariness especially on “those in fundraising mode now—which market up assets beyond reality.”

The truth remains that investors should no longer expect 20 percent or more percent in risk-adjusted returns, according to Guy Metcalfe, managing director and global co-head of real estate investment banking.

“What investors are migrated to are 15 percent net (in returns),” Metcalfe noted, “That’s a pretty good return; especially if it can be generated from more prudent levels of leverage than what was utilized in the past.”

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