Last summer, a consortium led by Deutsche Finance Group and including Turkish private equity real estate firm BLG, Germany’s biggest pension fund (BVK) and a large public insurer, and New York developer Shvo joined forces to acquire the ‘Gucci Building’ in Manhattan. Over in the UK, a consortium of UK and Canadian pension plans, led by the West Midlands Pension Fund, purchased Red Funnel, the original Isle of Wight ferry company.
These are among several high-profile consortium transactions that have taken place within the last 2 years and are indicative of a growing trend: institutional investors turning to multiparty investing to gain access to the competitive global real estate and infrastructure markets.
Multiparty investing takes many forms including consortiums involving several parties, simple joint ventures and fund investing where the investor typically takes a more passive role leaving the active management to the fund manager, who takes a fee for their services. In some scenarios, an investor may be investing in a fund established specifically for them or in a pooled fund with other investors. Each form of multiparty investing gives rise to its own set of challenges. Risks are as unique as each partnership and can include managing different investor profiles, issues in relation to substance and deemed agency liquidity risks, general partner and limited partner expectations, and specific regional challenges.
Benefits run deep
Scale, knowledge and a sharing of risk. These are among the obvious benefits of multiparty investing. For example, over the past several years, pension funds and institutional investors have developed significant interest in investing in infrastructure assets, which offer attractive long-term characteristics, such as protection against inflation. The challenge is the size of the required capital. Pooling resources is the only way to build the capacity to invest in these larger investments.
Building a knowledge base and gaining access to experience is another key benefit of multiparty investing. For example, an investor from Europe looking to make their first direct investment in the US may seek out a joint venture with someone in the US who has built a strong track record locally and has access to deals and transactions the European investor does not.
In the case of indirect investments via funds, the investor gains the experience of the fund manager in the form of access to the market, the ability to get deals done and working within the regulatory requirements. One of the key benefits of investing indirectly in a fund is risk diversification. Instead of only buying one asset, the investor is buying into a number of assets where the risk is economically diversified across a larger number of assets, different regions and currencies.
What's driving multiparty investing
Three interconnected key factors are behind the rise in multiparty investing:
- the low interest rate environment around the world, which has led to an increase in pricing
- the boom of alternative investments, such as investments into real estate and infrastructure, which has created a sellers' market
- with the sellers in the driver's seat, they can easily choose to whom they want to sell because of the excess capital in the market that needs to be deployed.
In this environment, joint ventures, consortiums and investments with fund managers facilitate access to deals.
Another factor increasingly leading institutional and sovereign wealth fund investors to seek out partners is the growing complexity of the regulatory environment, specifically with respect to finance and tax. By investing with others who have experience navigating the regulatory environment of a given jurisdiction, it becomes easier to find the right structure and the right transaction.
For example, institutional investors looking to make direct investment, origination, execution and asset management capabilities are critical. But not all institutional investors have the same level of sophistication.
The complex regulatory environment
Around the globe, from country to country, there are limitations as to what the investor can do both at the investor or investee location. For its own public pension funds, Canada has what’s called the 30 percent rule, which limits these institutional funds from owning more than 30 percent in any deal. This ensures the funds remain passive and do not own or manage companies outright.
Addressing the challenges of multiparty investing
Often the reason for partnering in an investment also presents challenges to making the deal happen. For example, a joint venture partner may have the experience and access to get a deal done, but they may also not align in other respects. The task is to find a partner or partners that fit the requirements, and align with the values and interests, of the investor.
For institutional investors looking to enter a multiparty investing relationship, we recommend:
- Choosing the right people. Controlling and managing an investment is important over the lifetime of the investment. It becomes even more important when investing indirectly via a thirdparty asset manager or partner if the fund already exists. Conduct due diligence at the fund level and at the portfolio level. In a consortium, it is critical that investors are like-minded, able to collaborate and have a clear understanding of each other’s investment philosophy.
- Understanding the differences in the jurisdictions of each partner as well as those of the jurisdiction where the investment resides. From a tax perspective, the relative position of the investors will vary as different countries may have more favored status, or better treaties. Some countries are more scrutinized than others because they have not provided the same level of disclosure. When the investors come together, some may be better off in one structure over another. From the outset, be clear on the relative sensitivities and what’s important in a preferred structure from one group of investors versus another.
- Having a risk management plan. While the potential for better governance is a key benefit of partnering in large-scale investments, it is important to put in place processes to address future regulatory changes or changes in the funds involved.