Last month’s lawsuit filed by Dallas Police and Fire Pension System’s against Cleveland-based advisory and investment firm Townsend Group, its former real estate consultant, is an unusual instance of an investor taking performance issues to court, said multiple industry executives.
In the lawsuit, DPFP alleges that Townsend, which consulted for DPFP from October 2001 to February 2016, caused the pension system to lose $580 million from its real estate investments, largely in uncompleted development projects . Townsend earned over $2.5 million in fees during its 15-year service for DPFP, which it is now seeking to recover along with damages and legal fees, according to the filing.
DPFP’s lawsuit is an uncommon response to a consultant’s advice on what was ultimately poorly-performing real estate investments, said Matt Posthuma, a real estate funds partner at law firm Ropes & Gray, which is not involved in the case. He said institutional investors typically terminate a consultant, rather than sue, if investments perform poorly.
“I’d hesitate to take one lawsuit and say it’s symptomatic of things to come,” Posthuma said. “One of the things I like about this industry is it’s fairly close-knit. You’re encountering the same people over and over. That part of it tends to keep people on their best behavior.”
Moreover, the lawsuit could prove to be detrimental to DPFP in the long run, he added: “If you’re going to sue your consultant, obviously you’re never going to work with them again. There’s not that many consultants out in the market in the real estate space. How willing are other consultants going to be to take on business from someone who sued their last consultant?”
A senior executive from another real estate consultant, who declined to be named, agreed such an event was rare, but said he was also surprised it had not happened already.
“Given the horror stories that I’ve seen and have been involved in trying to straighten out over the last eight or nine years, I’ve always been surprised that there’s never been any calling to account of the consultants who were involved more often than not in selecting the managers who made very bad investments,” he told PERE. “I would’ve thought that these lawsuits would’ve arisen before this, because the losses were several years ago and the markets recovered.”
The consultant speculated that institutional investors were reluctant to sue anyone, including consultants and managers, because of the potential reputational risk to the plaintiff and the difficulty of proving a breach of fiduciary duty in court.
For these reasons, the DPFP case “is a one-off for the industry,” he said.