Trends in real estate private equity

Operational efficiency and performance improvement

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The real estate fund sector is rapidly changing how it thinks about operational efficiency and cost controls. At the height of the market, most real estate private equity organizations were primarily focused on deal flow and business development.

Alongside regulatory reforms, cost control will be another major item on the agenda for funds revising their mid- and back-office functions.

Given downward pressure on fees, new demands from institutional investors and increased regulation, back-office effectiveness and cost reduction have become a higher priority.

Regulatory influence and industry trends driving change

For some time, investors have been demanding better operational performance of the managers of their real estate assets and governance over their capital. Heightened regulatory requirements across the US and Europe are now providing a catalyst for this change to occur.

Both the European Securities and Markets Authority’s Alternative Investment Fund Manager’s Directive (AIFMD) and the US’s Dodd-Frank Act will affect asset managers wanting to tap institutional investors for fund-raising.

And while the jury is out as to the impact of regulatory requirements on actually contributing to improved operational effectiveness and efficiency, some organizations have embraced the new requirements in pursuit of a broader operational agenda.

How have the costs associated with compliance under the new regulatory regimes impacted your operational effectiveness (resource time) and margins (profitability)?

How have the costs associated with compliance under the new regulatory regimes impacted your operational effectiveness (resource time) and margins (profitability)?

Source: Ernst & Young LLP

Outsourcing and offshoring

Alongside regulatory reforms, cost control will be another major item on the agenda for funds revising their mid- and back-office functions. With still relatively few market transactions and growing pressure from limited partners and potential investors to reduce management fees, funds are finding they must power the same business operations with less. This has had a notable impact on what solutions the sector is devising for trimming back-office costs.

If you outsource or are looking to outsource your back- and middle-office functions, what are the key areas you are focusing on (choose all that apply?)

If you outsource or are looking to outsource your back- and middle-office functions, what are the key areas you are focusing on (choose all that apply?)

Source: Ernst & Young LLP

Factors of size, scale and market

While outsourcing and offshoring are on the rise, it has mostly been multi-billion dollar fund managers setting this trend. Smaller players are instead leaning toward boutique service providers to supplement their mid- and back-office management staff. A few large open-ended funds are beginning to explore this space; however, it is still in a very early stage.

Risks for real estate funds

Risks for real estate funds

Source: Ernst & Young LLP