Flight risk is an issue on every GP’s mind today. With opportunity fund performance down by at least 36 percent in 2008 and almost 50 percent in the year to the third quarter of 2009, too many fund managers are struggling to retain key staff amid the reality there is little to no carry left in existing property funds.
So how can GPs continue to incentivise their teams? When asked whether LPs should permit GPs to earn additional carried interest for busted portfolios, Russ Bates, head of the Americas for Aviva Investors’ global real estate multi-manager group, countered that managers should be focused on solving their viability and turnover issues.
However, instead of cutting asset management fees, which many LPs are pressing for, Bates indicated that LPs and GPs should agree to reserve a portion of those fees to fund retention bonuses to the team.
The move, he said, would help keep the wider team – and not just key-man professionals – with the firm for the next few years while it dealt with legacy portfolios. Further, it would address investor concerns about potential turnover, allowing the fund sponsor to start fundraising again, he said.
GPs and LPs should have a goal of creating a pool of capital that clearly says to those people that in three years time we will give you this money provided you stay with us.
Russ Bates, head of the Americas for Aviva Investors’ global real estate multi-manager group
Bates said many private equity real estate GPs, including “sterling names in the industry”, were in danger of such “flight risk”, adding most fund managers faced a difficult dilemma between dwindling carried interest for their staff, and the opportunity of raising fresh funds that could offset declining team incomes.
As a result, GPs were at risk of losing key players to spin-outs and other platforms once those team members sense the real estate market has bottomed out.
“At least for the key asset managers and investment staff, GPs and LPs should have a goal of creating a pool of capital that clearly says to those people that in three years time we will give you this money provided you stay with us. It might not come close to the carry, but it should still be a significant amount of money to offer staff until a GP can raise the next fund,” Bates said.