June 9, 2015
Interviewed by: Privcap
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Want Foreign LPs? Be More Nimble

GPs need to be increasingly nimble in order to attract the unprecedented wave of foreign capital targeting U.S. commercial real estate, says RSM partner Tom Green.

GPs need to be increasingly nimble in order to attract the unprecedented wave of foreign capital targeting U.S. commercial real estate, says RSM partner Tom Green.

Want Foreign LPs? Be More Nimble
With Tom Green of RSM

Are you seeing more GPs raise capital from foreign investors?

Tom Green, RSM: It’s definitely a competitive environment from the funds perspective, in terms of attracting qualified and high net-worth investors. A lot of funds are going overseas to attract capital and that seems to be a big source right now, in terms of fundraising.

I think from the domestic funds, it’s an expansion of the existing sources. The larger funds are attracting a lot of investors because of their performance. And I think some of the newer funds that are launching are having a hard time attracting higher net-worth individuals. So, to some extent, the availability of capital in the U.S. has become somewhat limited, which I think is why foreign investors are somewhat attractive right now.

How do foreign investors want to invest? Through funds, JVs or directly?

Green: I think we’re seeing across the boardthat they like either direct investments or they like fund positions as well. To some extent, depending on the size of the foreign capital, their appetite for returns could be different from a standard investor. I think that has a big drive to it. From a funds perspective, when you’re attracting foreign capital, there’s definitely a cost to it because of some of the structuring that’ll take place, whether it’s setting up lockers or tailoring the operating agreement to provide for that type of investor.

Do you need to structure for foreign investors before securing a commitment?

Green: That’s a tough question because I think that a lot of times when funds are putting their PPM together, they’re not really sure what their investor mix is going to look like. A lot of PPMs are somewhat open in terms of what they can do from a structuring standpoint. And once you start landing some of those larger investors—whether it’s domestic, it’s exempt, or it’s foreign—then you start putting some things in place from a structuring standpoint.

What’s the biggest challenge for GPs?

Green: The biggest challenge is the structuring and the compliance. From a tax standpoint, there’s a whole host of issues that need to be addressed really upfront. Once you get rolling in terms of investing and reporting out, there are a number of tax things that need to take place in terms of K1 distribution. There could be some withholding items if they’re foreign investors. Then, in terms of how investments are made, [they] need to be considered with respect to the type of investor you have in the fund.

Do you see a need for GPs to offer more bespoke products to attract investors?

Green: I absolutely think you have to be more tailored, because there’s a tremendous amount of competition out there for investor capital right now. So, whether it’s a separate account, or a JV relationship or having them participate in the fund, you need to be somewhat nimble in terms of what you’re really willing to do. Even from the investor’s standpoint, I think when an investor comes into a fund and they’re able to offer a fairly large position, they’re probably going to want to negotiate some of the terms that are standard or typical in terms of your other investors.

What’s the greatest challenge when it comes to real estate fundraising today?

Green: It’s going to be to be able to identify opportunities. Again, there’s just a tremendous amount of capital. I just recently read something—that we had another record-breaking year in terms of capital raises in the U.S., which included both domestic and foreign investors. The challenge is going to be to be able to identify new opportunities to satisfy those investors’ appetites.

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