Natural selections: The changing ecology of real estate

Ever-closer scrutiny is being applied to the operations of fund managers, finds Richard Urban.

Richard Urban is a Jersey-based independent non-executive director on the boards of funds and joint ventures.
Richard Urban is a Jersey-based independent non-executive director on the boards of funds and joint ventures.

Residing in Jersey has numerous benefits, one of which is the ability to become immersed in the incredible natural environment. There are myriad ways to explore the marine habitat and varied coastline. Inland, winding country lanes criss-cross a patchwork of fields which harbour two quintessential symbols of the island: Jersey cows and Jersey Royal potatoes. The combination of maritime and agricultural influences help to give Jersey its distinctive character.

Ruminating on this, I have concluded that Jersey life has brought me much closer to nature, certainly in comparison with my prior London-based existence. In particular, I am more aware of the changing patterns and cycles that are occurring around me; the daily ebb and flow of the tides and the seasons marked by the planting, growing and harvesting of crops.

Although my perspective has changed, my involvement in the fund management industry has remained constant. My visits to London highlight the stark geographical contrasts with Jersey, but the two locations share strong economic, financial and fiscal links. For example, both are leading international financial centres and both have a huge presence in the global fund management industry. Furthermore, Jersey often shares a real estate transaction chain with London. Many high-value London (and UK and European) properties are held in Jersey structures and are serviced by a range of Jersey-based third-party service providers, such as accountants, administrators and lawyers.

As an independent non-executive director (NED), I sit on the boards of a number of these Jersey structures, which are typically real estate debt and equity funds or joint ventures (JVs). The board is responsible for provision of the structure’s risk management and corporate governance and is therefore empowered to make key decisions, ensuring that the best interests of investors are kept at heart. It is a broad remit which inter alia involves the consideration of investment recommendations proposed by the fund manager and the appointment (and ongoing evaluation) of the third-party service providers.

Vantage point

Positioned at the nexus of fund managers, investors and third-party service providers, I occupy an exceptional vantage point from which to survey all three parishes. Thus, just as my position in Jersey allows me to observe the changing patterns and cycles in the natural environment at close proximity, I can also bear witness to the changes which are emerging in different fields of the fund management landscape.

One such change is the renewed vigour with which investors are pursuing their due diligence of fund management platforms. In particular, investors are increasingly keen to ensure that a fund manager’s investment competence is matched by a sound operational infrastructure. This change has been driven by the recognition amongst investors that losses caused by negative market movements can be exacerbated by poor decision making and the failure of risk management systems. I commend the implementation of more rigorous and wider ranging operational assessments, especially when they are coupled with equally stringent front office due diligence. I have termed this emerging trend the ‘holistic approach to excellence’, as it is designed to identify those fund management platforms which are committed to high standards of operation across every facet of their business.

As part of the holistic approach to excellence, a number of investors have recently implemented a NED due diligence procedure, which is designed to assess NED suitability and competence. These investors have recognised the board’s pivotal role and its key corporate governance and risk management responsibilities. Therefore, they are keen to ensure that the board is staffed appropriately and functions as intended. As a subject of this new NED due diligence procedure, I have completed various detailed questionnaires and participated in numerous interviews with investors.

Although a vanguard of investors are spearheading the demand for holistic excellence, I believe that the approach will become the industry standard over the coming years. Those fund managers which are first to respond and adopt the holistic approach to excellence themselves (thereby meeting or exceeding investor expectations across all areas of operation), will have a competitive edge over peers. As investors become increasingly discerning, it is these holistically minded fund managers that will benefit most from capital inflows in the new paradigm.


Another key change in investor psychology is the increased desire to achieve an alignment of philosophies, not only with the fund manager but also with any fellow investors. During the global financial crisis, many investors became embroiled in situations where disparate investor philosophies hampered decision-making processes, even on such crucial decisions as fund extensions or equity recapitalisations. The delays caused by deadlocked situations were often destructive to capital.

To avoid repeating the mistakes of the past, investors which make the greatest capital contributions to funds are increasingly seeking to ensure that they not only obtain a seat on the investor advisory board (thereby gaining consultation and consent rights on certain fund manager decisions) but also that the advisory board is constituted by like-minded investors.

Investors with significant capital are able to go one step further and compel a fund manager to establish a single investor managed account or a JV with a small group of similarly minded investors. By investing alone or alongside those with resonating philosophies, the potential for conflict is removed or vastly reduced and the decision-making process is expedited. As investors seek a wider range of investment arrangements, holistic fund managers which are accommodating of these changing investor requirements will be in strong demand.

A number of changes are also occurring in the fund administration industry. Private equity owners have been attracted by the sector’s ability to generate relatively stable recurring revenues and by its fragmented nature, which provides opportunities for consolidation. As administrators undergo full and partial sales to private equity platforms, fund managers are establishing widely different views on the trend. For some, it is welcome, as they believe that high-quality administrators can subsume their lower quality competitors, whilst sub-optimally managed business can benefit from a renewed focus on process and efficiency. Conversely, other fund managers remain sceptical and their concerns stem from a fear that the focus on existing client relationships will diminish as attention shifts to platform growth.

Complex regulation

Changing market dynamics have created a number of other challenges for administrators: They must ensure that all administered entities are in full compliance with the constantly evolving and increasingly complex regulatory landscape. They must also meet the increasing demands of fund managers which expect a greater array of services and an integrated approach, whereby administrators seamlessly interact with the manager’s in-house operations team and IT infrastructure.

Furthermore, as investors and fund managers demand higher levels of expertise and independence on the boards of funds and JVs, independent NEDs are increasingly being appointed to sit alongside those senior administrators who act as board directors. This places additional responsibility on administrators to ensure that all policies and procedures are correctly followed. Lastly, just as investor due diligence of NEDs is becoming more commonplace, administrators are increasingly subject to investor due diligence.

Increased attention on the performance of administrators is driving fund managers to become even more discerning. Sub-par performance (which typically manifests as a lack of sufficient expertise, a disjointed approach or a breakdown in reliability) is no longer tolerated. Fund managers are therefore becoming more willing to replace their administrator, even though a long-standing relationship may be broken and the logistics of making the change are often daunting. Capturing this sentiment and seeking to aid the fund manager’s decision-making process, some administrators have assembled dedicated transition teams which ease the cumbersome operational burden of transferring clients from a rival administrator.

These examples show how the interconnecting fields of the real estate fund management landscape are subject to a diverse range of simultaneous changes. But change, by nature, is nothing new. Writing on the subject over 150 years ago, the American naturalist and philosopher Henry Thoreau (whose family name originated in Jersey) wrote: “Live in each season as it passes; breathe the air, drink the drink, taste the fruit and resign yourself to the influence of the earth.”

Those of us active in the real estate fund industry must take Thoreau’s advice, recognise the influence that the constantly changing environment holds, and fully engage with it. By choosing to participate in themes such as the drive towards holistic excellence and the insistence on greater independence and expertise, we can harness the power of the changing landscape to cultivate a fruitful existence together. After all, tomorrow’s harvest will be reaped from the seeds which are sown today.