November 10, 2009
Raising money for a new fund? Cut your management fee and throw off better returns. That’s the trend following years of mismanagement by many real estate investment firms who continued to invest wildly despite clearly being in a market which was detached from historical norms and reality.
Pension funds, endowments, and other investors are now seeking lower management fees, and higher hurdle rates before they invest. One example is from Lone Star which is cutting it’s management fee nearly in half.
Lone Star’s two new funds, Fund VII and Real Estate Fund II, are targeting 25% average annual returns through investments in distressed commercial, residential and corporate debt. Lone Star’s Mr. Grayken told the Oregon pension-fund board that he saw an “unprecedented period of supply” of distressed debt and that he would have few competitors in buying it.
Mr. Grayken founded Lone Star in 1995, and Oregon, which has invested in all of his funds, says it expects to gain an average annual return of 29% from those investments.
But to win new commitments from big investors like Oregon, Lone Star reduced the minimum management fee it will charge in the two new funds to 0.35%, down from 0.75% in its previous fund. In addition, the return hurdle after which Lone Star gets a piece of the profit was raised for investors who put up the most money. Mr. Grayken declined to comment through a spokesman.
Lone Star isn’t the only real-estate fund manager trying to sweeten the deal for potential investors. Ethan Penner, who helped pioneer the securitization of commercial-property loans in the 1990s, is raising two new funds for CB Richard Ellis Group Inc. affiliate CBRE Investors to buy and originate commercial mortgages. Mr. Penner hopes to raise an initial $500 million for each fund by year’s end.
To do that, Mr. Penner is offering special benefits to “founding investors”: a seat on the fund’s advisory board, a first look at opportunities for additional investments, and a share of a 10% ownership interest in the general partnership of the new fund, according to people who have heard CBRE’s pitch. That last arrangement means that founding investors would receive a portion of the fees paid to Mr. Penner and his colleagues. Mr. Penner declined to comment through a spokesman.
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