FundFire: Bain-Harvard Deal Highlights Consolidation Pressure featuring Peter Martenson
Bain Capital’s talks to hire the real estate team at Harvard University’s endowment shows appetite remains high among private fund managers to expand into new arenas and products – in part because institutional investors are still paring down their rosters of alts managers. The discussions, first reported last week, would entail Bain hiring about 20 professionals on Harvard’s team, with the private equity manager taking over the endowment’s direct real estate investment portfolio and presumably using that group as a foundation for its first business in the asset class. Bain, which runs more than $75 billion, and Harvard, which has $37.1 billion in assets, both declined to comment on the talks. Such a deal would not only make Bain the last of the largest private equity managers to add a real estate arm – after moves in recent years by KKR, Ares Management, and TPG Capital – but also further a trend in which big managers have been expanding further out of their core areas. A slew of private equity managers this year have bounded into private credit, and even real estate players such as Brookfield Asset Management have been moving into private equity. Many of the moves trace back to managers seeking ways to grow their asset bases at the same time many large investors are trying to simplify their alts portfolios, says Peter Martenson, partner at Eaton Partners, a placement agent firm. "It’s really driven by the desire from [limited partners] to concentrate relationships with managers they feel comfortable with," he says.Managers also feel pressure to keep up with rivals that have made the jump to expand, Martenson says. It may not just be a trend for the largest private fund managers and investors. Smaller institutional investors may be another source of demand for consolidatino, says Taylor Mammen, managing director at RCLCO, a real estate investment consulting firm. "We do see more of this: Having a one-stop shop for a variety of investing needs can be desirable for a big section of the institutional investment world," he says. And more managers down-market now are following larger rivals into areas such as private credit, Martenson says. "Now, it’s coming down to the middle-market shops," he says. But a deal between Bain and Harvard would be a unique twist on the expansion concept, and one that will be closely watched, Mammen says. "It’ll be interesting to see how it works out," he says. "It’s an experienced endowment team, but one that’s not used to managing other investors’ capital and [putting together] funds. Managing deal exits in a fund structure, that’s complicated stuff. It takes a while to learn how to pace the investments – there’s definitely a learning curve there." Shifting from an endowment investing model to a private fund business may be easier in a setting where a large private fund platform – with investor relations resources and other functions – already exists, says Sanjay Mansukhani, senior manager research consultant for private equity at Willis Towers Watson. "People that aren’t used to the minutia of the private asset space – like using subscription financing – will benefit [from an existing platform]," he says. "There are important details they will need context on." In Harvard’s case, the endowment already is "fairly commercial" in its operations, making any future transition less of "a leap," Martenson says. And endowments in general are more pure investors in style, often "playing to win," a mold that may fit well with the private funds business, Mansukhani adds. Bain, meanwhile, already has experience with launching new product lines, having added a credit arm decades ago, and more recently a venture business and an impact investing group. That will help in any new effort, says Lee Gardella, head of the U.S. office at Schroder Adveq, a private equity fund of funds. "That gives some confidence that adding a real estate team is not going to hurt the private equity team," he says. Any manager expanding into a new area nevertheless is likely to face a heightened due diligence review, Gardella says. "The thing we’re most sensitive to is execution risk – the risk of shifting focus and discipline because now the key principals have a bigger responsibility to monitor," he says. "Does adding new products or strategies end up diluting the skills or the reasons we were investors to begin with?" Another question is how committed a manager is to any new investing area, Mansukhani says. "How important is the strategy to the firm that’s buying it?" he asks. "Will it be getting the resources it needs to ensure the product line succeeds, and not be just another add-on? Are you going to give [the new team] the runway to be successful?" And for managers getting into real estate for the first time, consultants may question their knowledge of a "fundamentally inefficient market" where no two assets are the same in investment terms, Mammen says. "Information in the market is imperfect, and even if it’s good, it’s opaque," he says. "There is an informational advantage or disadvantage depending on your position or knowledge. So you’ll want to see if they have enough ground-level expertise to make good decisions." Investors and consultants should also study the end economics of a new team’s structure within a firm to ensure that compensation for individuals running it is adequate, Mammen says. They should also check that the firm’s revenues are aligned with the investor’s returns, and not set up for the manager to simply collect fees, he says. One big question for Bain and Harvard may be timing, as many observers see the real estate private funds market as late in its cycle. "There will be a challenge on real estate because it’s not undiscovered country," Martenson says. "If they come out and make a clear argument that their strategy is unique and differentiated, they certainly should be able to raise capital."