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Institutional investors discuss best practices for the private equity real estate annual LP meeting

LP PerspectivesThe Annual Meeting

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LP Perspectives: The Annual Meeting, January 2017 2

LP Perspectives: The Annual Meeting© Copyright by Shelter Rock Capital Advisors LLC (2017), 45 Rockefeller Plaza, New York, New York 10011. Shelter Rock Capital Advisors is a registered broker-dealer and member of FINRA.Editor: Zoe HughesArt Director: Jennie Isgro

About Shelter Rock Shelter Rock offers strategic fundraising and advisory solutions for real estate and real assets managers. The firm brings together senior professionals with extensive real estate capital raising, advisory and communications experience. Through our multi-disciplinary approach, Shelter Rock offers a wide range of comprehensive and tailored solutions from capital raising for commingled funds, joint ventures, clubs, separate accounts and direct real estate investments to advising—and delivering upon—real improvements to real estate investment managers’ LP communications and strategic vision. Shelter Rock Capital Advisors is a registered broker-dealer and member of FINRA.

LP Perspectives: The Annual Meeting is the first in a series of publications to be produced by Shelter Rock® Capital Advisors LLC providing institutional investor insights into the operation of private equity real estate GPs.

The report reflects the views of individual LPs who were personally interviewed by Shelter Rock during the course of the fourth quarter 2016. Shelter Rock conducted face-to-face and telephone interviews with 18 U.S., Canadian and European institutional investors to gauge which, if any, practices could make annual meetings more effective, and valuable, for LPs—and which could help drive LP attendance.

Interviewees represented a wide range of investors, including U.S., Canadian and European public pension plans with real estate portfolio values ranging from $2 billion to more than $20 billion; U.S private pension plans with real estate portfolio values ranging from more than $200 million to more than $1.5 billion; global and U.S. multimanagers with real estate portfolio values ranging from $200 million to more than $2 billion; and investment consultants with more than $10 billion of real estate assets under advisement. Real estate portfolio values were calculated in U.S. dollars as of January 1, 2017, with information sourced from investor websites, investor materials and Preqin.

Throughout the report, the views of investors have been represented as direct quotations without attribution to allow for an open discussion of the topic and to ensure the privacy of those involved. Where applicable, an indication of an investor’s real estate portfolio has been provided.

The views expressed in the report do not represent the opinion of Shelter Rock.

Finally, this report would not have been possible without the generous support of the institutional investors interviewed. Shelter Rock sincerely thanks all the LPs involved in this report for sharing their time, insights and expertise—and their sincere desire to help make the private equity real estate annual LP meeting a valuable experience for everyone.

Enjoy

Zoe HughesDirector, Investor Communications AdvisoryShelter Rock Capital Advisors LLCwww.shelterrock.com

Notice to Readers

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5 Core Principles for Better Annual MeetingsWhen it comes to investor relations within private equity real estate, there is no list of industry-accepted rules to follow. There is no checklist on how best to build—and strengthen— relationships with institutional investors. And there is certainly no one-size-fits-all approach.

However, when it comes to creating enduring partnerships with real estate limited partners, the annual investor meeting can be a critical tool that is sometimes overlooked.

Not only is the annual investor meeting a time to review a fund’s strategy and performance, but it’s also a time for general partners and LPs to share and understand respective concerns and challenges. It’s a time for reconnecting face to face with one another and for investors themselves to network with their fellow LPs.

Yet, there are few, if any, guides as to what a successful annual investor meeting looks like.

With this in mind, Shelter Rock set out to determine best practices for private equity real estate annual meetings from the institutional investor perspective.

Throughout the fourth quarter of 2016, Shelter Rock conducted in-depth interviews with 18 U.S., Canadian and European institutional investors to gauge what, if any, practices could make annual meetings more effective, and valuable, for LPs, and what could help drive LP attendance.

All institutional investors interviewed stressed there was no one “right” approach to annual meetings. Each meeting was a reflection of the GP’s size, the number and maturity of their funds, and the scale and mix of the investor base. “Every GP is its own unique animal and they have their own unique investor base,” said the former real estate head of a U.S. public plan (>$10 billion real estate portfolio). Despite that acknowledgement of individuality, all of the

Transparency of Information

institutional investors interviewed agreed there were a number of core principles that should guide every annual investor meeting within the private equity real estate asset class.

There were, naturally, disagreements as to the importance of some of the core principles, including whether it was essential to showcase the wider GP team or whether guest speakers were critical components to meetings.

However, two core principles won universal backing from investors—transparency of information and opportunities for LPs to network with each other.

What follows are five key takeaways from our conversations as well as several pieces of advice from investors to GPs and other LPs.

LP Networking

The GP Team

Market Outlook

Guest Speakers

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There was no disagreement among institutional investors about the primary reason for annual meeting success—transparency of information.

Every investor urged GPs to make the best use of LP time by focusing significant attention on the drivers of returns and the attribution of those returns, rather than using the annual meeting as a marketing exercise to pitch to existing and prospective investors.

“We don’t need a marketing presentation because I’m already invested in you,” said one U.S. private pension head of real estate (<$500 million real estate portfolio). “What distinguishes one manager from another is their ability to create value. I want to understand what the components of value creation are for each asset,” the private pension head of real estate added.

Another U.S. private pension portfolio manager ($1-$5 billion real estate portfolio) explained: “I often walk away feeling that I don’t get an update. I get a story they want to tell me.”

The key, the investors agreed, was to highlight the drivers of returns, both positive and negative, and the attribution of those returns.

“It’s all about transparency and making it worthwhile for the investors. We don’t need elaborate dinners. Spend the time putting the information together,” said a European public pension managing director (>$10 billion real estate portfolio).

One U.S. multimanager managing director (<$1 billion real estate portfolio) agreed, saying the most “interesting” information relates to the attribution of value drivers. “Where did the value creation come from? What value was on the buy? What did you do to the asset during the hold period? Is NOI improving or changing? What about the exit?” the managing director said.

And in delivering that value creation story, it was critical to ensure performance is compared back to the original business plan and original underwriting and how it all relates to return drivers. “Very few GPs do this well,” the managing director said.

A former U.S. private pension head of real estate ($1-$5 billion real estate portfolio) echoed the importance of comparing performance

back to original underwriting. “Where are revenues and expenses, and are they in line with underwriting?” he said. “Where is the cap rate today versus original underwriting? A manager should be saying ‘I’m going to show you what is happening with your capital, from the asset to the LP pocket, and here’s where it is, and isn’t, going to plan.”

In the wake of the financial crisis, investors are vigilant when it comes to identifying portfolio risk, not least relating to whether GPs are on track to perform as expected and the impact that could have on the overall real estate portfolio and performance of the asset class.

That attention paid to performance risk means GPs need to be as open about the negative news in annual meetings as they are about the positive news.

“Bad news should travel at the same speed as good news,” said the private markets head of a U.S. private pension (<$1 billion real estate portfolio).

When it doesn’t, the LP said, it’s just not credible. “[Don’t tell me just] what you think is going to make me happy. If there’s not a baseline level of respect that goes in both directions, it’s not going to work.”

It’s about highlighting deals that are “representative of the fund”, said one private U.S. pension investor ($1-$5 billion real estate portfolio), adding: “And I don’t just want the good stories either. If 99 deals out of 100 are great, I don’t want to harp on the bad one, but I feel there’s very little discussion about the things that don’t go well.”

One global secondaries investor was even more blunt: “There is a direct correlation in terms of openness and transparency and success in raising capital.”

What distinguishes one manager from another is their ability to create value.- U.S. private pension

There is a direct correlation in terms of openness and transparency and success in raising capital.- Global secondaries investor

Transparency Information

of

Core Principle #1



In deciding which assets are reviewed at an annual investor meeting, a majority of investors called for most GPs—particularly more mature fund managers with large portfolios—to be selective.

Few LPs have the bandwidth to go through a full day breaking down every asset in a fund, according to one former U.S public pension director ($15-$20 billion real estate portfolio).

Instead, LPs said the focus should be on those assets that are representative of the fund, those that the GP is spending more time on, including the “risky assets”, the “troubled assets” or the assets that will “move the performance needle in the near term and long run”.

Where managers did review all of their individual deals, brevity and being “succinct” was typically advised, with suggestions of speaking from just one to two minutes, and not exceeding 10 minutes, per deal.

Although almost all investors acknowledge the difficult balance between “killing people with information and being too superficial,” as one U.S. multimanager head of real estate (<$1 billion real estate portfolio) said, there were key data points most were looking for in the annual meeting and annual report.

The primary focus most sought after was the components of value creation, but others included: “Actual net and gross returns to the project, and multiples on a deal-by-deal basis.” “A total snapshot of the fund with an updated pathway to our capital calls and distributions, and how much is expected to be called and distributed in the coming year.” “Use of debt in the fund at an asset level and fund level.” “Who are the lenders?” “Don’t be afraid to project returns and don’t be afraid to project when you plan to sell things.”

Should GPs review every asset at their annual investor meeting or just a selection? What is the most important information for LPs? Investors offer some advice

How Much Is Enough?

Key Advice



to the immediate aftermath of the financial crisis as a major lesson learned in what it takes to ensure the smooth operation of a fund through its entire life cycle.

“After the crisis, we went through a manager restructuring and had weekly calls between investors and the GP. But the LPs set up a separate call afterwards just for ourselves,” said the investor.

“We wanted to talk about where we all were, where each of the various plans stood [in relation to certain issues]. I may have had a strong position in one fund and been willing to put in extra equity, but another large fund may have decided it wasn’t worth the effort and written it off. Everybody’s positions can be so incredibly different … [and the LPs are trying to find] common links and common goals,” the former public pension real estate head said.

The ability to phone in to annual meetings was appreciated, but several investors accepted it could be a “painful” experience. “When you’re not in the room, you’re not as engaged,” said a Canadian public pension director (>$10 billion real estate portfolio).

The annual meeting isn’t just about a GP meeting its investor base face to face, it’s also about fellow LPs networking with each other. In fact, several interviewees called for specific LP-only time during the event.

While some institutional investors openly described themselves as vocal during the interviews, they accepted that not all real estate fund LPs were made the same, and six of the investors interviewed recommended an LP-only meeting during the course of an annual event.

“It’s important that investors are vocal, but not all investors are willing to do that, not all investors are willing to speak up in front of the manager,” one European public pension senior manager (>$10 billion real estate portfolio) said. “During LP-only meetings, most investors speak up and we all know what each one is thinking about.”

Encouraging such communication among investors wasn’t just helpful to the LPs, the public pension senior manager added, but also to the manager, who could get direct feedback from an investor spokesperson attending the session.

“LPs go when they know other LPs are going to be there as well and there will be good relationship-building for them,” said one head of real estate at a global multimanager ($1-$5 billion real estate portfolio).

It was a thought echoed by a former U.S. public pension plan director ($15-$20 billion real estate portfolio), who said: “The real reason I went was to be around other LPs.”

Although opinion was divided on the need for LP-only sessions, each investor highlighted the importance of networking opportunities during which LPs can build relationships and learn about each other’s priorities and concerns. It was a factor underlined by a former U.S. public pension head of real estate ($10-$15 billion real estate portfolio), who pointed

LP Networking

The real reason I went was to be around other LPs.- Former U.S. public pension

Everybody’s positions can be so incredibly different … [and the LPs are trying to find] common links and common goals.- Former U.S. public pension

During LP-only meetings, most investors speak up and we all know what each one is thinking about.- European public pension


Core Principle #2



“It’s really annoying when there’s an agenda change at the last minute. It happens all the time. Please don’t move it as I’ve booked travel and other meetings around this agenda.” U.S. multimanager real estate head (<$1 billion real estate portfolio)

“I rotated [investment officers] around GP relationships because it was great to have a new set of eyes on those investments.” Former head of real estate, U.S. public pension ($10-$15 billion real estate portfolio)

“Sometimes investors just sit there and write down what a GP is saying. Listen to what’s being delivered, hear the context of the presentation and make a critical assessment of what the manager is saying and presenting.” Former head of real estate, U.S. private pension ($1-$5 billion real estate portfolio)

“Send the information out in advance. If you hold the meeting on a Monday or Tuesday, send [the presentation] out by Friday. Request questions from LPs in advance so everyone will have to think about it. It’s important for people to be part of the day.” Managing director, European public pension (>$10 billion real estate portfolio)

“Focus on your capabilities and what you do best. Keep it real. Don’t try to be something you’re not. Be authentic to your size and your LP base.” Head of real estate, global multimanager ($1-$5 billion real estate portfolio)

“If you’re small enough, hold your meeting at the office of a law firm. It’s getting harder and harder to choose a venue as many LPs can’t sign off on the expensive hotels.” Former head of real estate, U.S. private pension ($1-$5 billion real estate portfolio)

Advice From Investors



Imagine managing 55 investments through 40 different GPs with a team of just two. Now imagine trying to personally attend at least 15 to 20 annual meetings a year in two condensed eight-week periods in the spring and fall.

That’s the reality for many LPs we interviewed, with the majority attending up to 20 events a year themselves. So it comes as no surprise that investors will prioritize what annual meetings to sign up for.

LP networking was cited as a key reason for attending annual investor meetings alongside monitoring fund performance, a response that included factors such as being an advisory board member, supporting a GP relationship, monitoring a large exposure or checking in on a problem fund.

The timing of an annual meeting can also be a factor in determining attendance, not least in the peak months of April, May, September, October and November, when a majority of U.S.-based GPs typically holding their meetings.

Several investors recommended looking outside this window for an alternate time to hold annual meetings, potentially to January or February. One former investor also suggested approaching two or three LPs that are “critical” to a GP’s fundraising efforts and building a date to match their availability.

And almost all investors urged GPs to appreciate LP schedules’—and the limited amount of time they have—with many saying they often flew in

cal·en·dar/ kaləndər/

noun1.a chart or series of pages showing the days, weeks, and months of a particular year, or giving particular seasonal information.synonyms: schedule, agenda, almanac, diary, program, annual, yearbook; trademarkdaytimer"a calendar of events"

verb1.enter (something) in a calendar or timetable.

Setting A Date, Driving Attendance

for meetings and straight back out again the next day or two days later. For larger and international investors, it wasn’t uncommon to attend two or three meetings a week, especially in the peak annual meeting season.

When an investor can’t attend the annual meeting, a GP should offer a personal, shortened version in the LP’s own office, a former real estate head of a private pension suggested ($1-$5 billion real estate portfolio).

“This helps the GP two-fold,” they said. “It accommodates the LP’s needs and there’s the potential for the GP to meet not just the primary LP contact but other people in the office as well. And it’s always good to have more people on your side.”

Key Advice



The annual investor meeting is a chance to showcase not just the assets and overall performance of a fund, but to demonstrate the depth and breadth of a GP team.

“Give the team a chance to stand up and talk about their investments,” said the head of real estate at a U.S. private pension (<$1 billion real estate portfolio).

It was an argument supported by several investors who urged GPs to consider giving speaking roles to acquisition and asset management professionals. “It’s about access to people on the ground, those doing the acquisitions. I absolutely want to see those people,” said a former senior investment officer at a U.S. public pension ($1-$5 billion real estate portfolio).

One European investor disagreed saying deliberately demonstrating the depth of the team wasn’t necessary. “We conduct due diligence on the manager, including junior and senior members. We see all the people,” the senior manager (>$10 billion real estate portfolio) said.

While showing a deep bench was important, for smaller managers it was also critical to stress the leadership abilities of those at the top, said the head of real estate at a global multimanager ($1-$5 billion real estate portfolio).

“At the end of the day for more emerging and smaller managers it’s about the people at the top and their ability to build a company and lead. You want to see the team, but you don’t want to put yourself in a corner,” they said.

One question posed to investors was whether advisory board committee meetings should be open to non-voting LPs.

While some current and former advisoryboard members supported more investors attending, many LPs talked about the challenges of maintaining a small-enough committee meeting to encourage frank investor discussion.

They said it was therefore vital for advisory board members to give other LPs in the fund as much of a voice as possible. As such, several LPs urged the GP to distribute minutes or a report of the board meeting to all fund investors immediately afterwards.

One former head of real estate at a U.S. private pension also recommended holding board meetings the night before an annual meeting so the GP can present an overview of decisions made to all investors. “We didn’t want a two-tier system,” they said.

Despite pressures on LP time, asset tours were deemed a must-have by some investors, with most valuing the ability to get closer to the property and the team on the ground.

Although site visits could be “exhausting”, they were a perfect way to showcase a deal and the people involved, said one U.S private pension real estate head (<$1 billion real estate portfolio).

For others, the bus tour itself often provided rare networking time to chat to wider GP team members and other investors, with the senior manager of a European public pension saying: “It’s always nice to talk more informally with GPs and other LPs because you [often] learn more from the informal setting than you do the formal.”

However, one former U.S. private pension head of real estate ($1-$5 billion real estate portfolio) urged GP’s to always keep in mind the reason for annual investor meetings: “It’s great to see the asset but at the end of the day, it’s about the capital the GP was given. What have you done with it and where is it in the investment cycle in the fund.”

For some investors, the annual meeting was a time for GPs to show some green credentials and adopt digital technology for presentation materials.

Two European public pension LPs said it was very important for GPs to do as much as they could electronically—not just owing to environmental sustainability—but also in recognition –of LP travel schedules and having to carry the books around the globe. One LP wondered how many investors kept physical books for reference long-term.

One U.S. private pension portfolio manager said they loved the use of tablets for presentation materials, which allowed them to have their notes emailed back to them.

Many LPs, however, said they preferred printed hard copies of the annual meeting book, with one former U.S. private pension real estate head saying: “People write down comments in the margin about what’s critical or not to the asset. Don’t have black backgrounds, it’s white backgrounds and margins.”

GP Team

Advisory Board Meetings Asset Tours Digital or Printed Materials?

Core Principle #3



A GP’s outlook on current market conditions is often deemed a valuable component of the annual meeting—provided it specifically relates back to the assets and fund.

Sitting through a generic presentation on millennials for the 15th time in one year can prove frustrating.

“I’m getting [market outlooks] over and over again from every one of my GPs,” said the head of real estate at a U.S private pension (<$1 billion real estate portfolio). “Keep it in the appendix, let’s talk about the assets and funds, here’s what I thought was going to happen and here’s where we’re feeling excited and upset.”

Closely related to the transparency of information core principle, the market outlook should provide investors with a sense of whether strategies are on track or if the market has shifted since the fund’s inception. It’s a chance to give LPs, “anecdotal evidence about things you’re seeing in the market and it’s about answering the big question: ‘What’s the next game?’” said the global secondaries investor.

“Talk about what you’re really seeing on the ground since the last meeting,” suggested one U.S. multimanager managing director (<$1 billion real estate portfolio. Instead of just offering another macro market

outlook, talk about “the bidding on deals [since last year], whether you have won or lost more deals, if debt has tightened up, how the sales market is performing. We can get good research reports pretty easily but what you’re seeing on the ground, that’s interesting.”

For several LPs, a market outlook tied back specifically to fund activities, assets and strategy can help investors apply “takeaways” across their entire real estate portfolio.

“What are your views on the next one to two years? What are you seeing? What are the opportunities? What are you worried about? What are you focusing your efforts on? [Answers to questions like these] let me think, ‘Are my other managers thinking about this?’,” said a Canadian public pension director (>$10 billion real estate portfolio).

Guest Speakers

Market Outlook

The largest private equity real estate investment manager in the world may be expected to recruit a former political leader as an annual meeting keynote address but for most investors, guest speakers are not a necessity.

Indeed, three U.S. investors and one consultant downplayed the role of keynote speakers with one U.S. multimanager real estate head (<$1 billion real estate portfolio) saying they are not “a huge fan” of these marquee speakers. “We hear these 20 times at different annual meetings.” “[Speakers can be]

interesting and potentially dangerous at the same time, because if they’re political speakers some LPs can’t be in the same room,” added a research consultant at a global consultant. “You really don’t need to have a keynote speaker. The [LP] networking is still more important,” they said.

For others, guest speakers were “very valuable” and “always very appreciated”, particularly when the speaker provided an independent economic overview or they delivered a perspective from outside the real estate asset class.

You really don’t need to have a keynote speaker. The [LP] networking is still more important.- Consultant

“[Market outlooks] let me think, ‘Are my other managers thinking about this?”

“They do add to the quality,” said the European public pension managing director (>$20 billion real estate portfolio), while the former real estate head of a U.S. private pension ($1-$5 billion real estate portfolio) said an inspirational speaker, such as an author, could be a “treat”.


Core Principle #4

“Remember the person on the other side of this conversation,” said a partner at a U.S. real estate multimanager (<$1 billion real estate portfolio). “Investors have 10, 20, 40 relationships and we’re all trying to think diversely across the portfolio,” the partner said. “Interesting content can help raise questions for investors to think about their exposure and for them to go ask their other managers.”

Core Principle #5

Zoe HughesDirectorInvestor Communications [email protected]

Walter StacklerManaging [email protected]

Shelter Rock® Capital Advisors LLC offers strategic fundraising and advisory solutions for real estate and real assets managers. The firm brings together senior professionals with extensive real estate capital raising, advisory and communications experience.

Through its Investor Communications Advisory (ICA) vertical, Shelter Rock provides GPs with a highly-specialized focus on investor reporting helping investment managers conceptualize, craft and deliver outstanding content. Led by Zoe Hughes, a trusted voice in private equity real estate and a highly-experienced journalist in commercial real estate and global politics, ICA offers comprehensive and customized solutions for the content-creation and production of annual meetings, quarterly and annual reports and ad-hoc communications.

All ICA services are grounded in LP surveys and research, talking with a manager’s investors, and taking the pulse of Shelter Rock’s extensive institutional investor relationships to deliver a service that increases LP engagement, fosters deeper LP connections, and elevates the GP’s message above its peers.

For more information about this report and how Shelter Rock can help deliver best-in-class communications to institutional investors, contact:

About Shelter Rock Investor Communications Advisory

LP Perspectives: The Annual Meeting. © Copyright by Shelter Rock Capital Advisors LLC (2017), 45 Rockefeller Plaza, New York, New York 10011. Shelter Rock Capital Advisors is a registered broker-dealer and member of FINRA.

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