Year-End Investor Sentiment
Investor and Consultant Survey Offers Insight on How to Enhance Relationships in a Post-COVID-19 Market
The global pandemic has been a disruptor for traditional workflows and business practices across industries, and private equity real estate investment is no exception. Investment managers and investors have quickly adapted to remote working and new policies and procedures required to fit the current virtual environment. Limitations on travel and in-person meetings will likely continue into the foreseeable future. Alliance Global Advisors recently surveyed investors, with over $634 billion in assets under management, and consultants, with over $1.6 trillion in assets under advisement, to help managers better navigate these unchartered waters and improve their interactions with investors in the post-COVID-19 market.
Early on in the pandemic, many investors hit pause on pursuing investments amid uncertainty surrounding the economic and commercial real estate impacts. Even as investors resumed investing, managers broadly felt the ripple effects. Some investors chose to limit investments for consideration to those that included a joint venture partner they could rely on for on-site diligence, or they addressed only those investments that were within driving distance. In other cases, new and emerging managers were put on hold due to a lack of confidence in virtual due diligence from the managers.
Throughout COVID-19 people have adapted to new virtual methods as they have resumed due diligence and investment pipelines. A majority of organizational due diligence has shifted to video conference meetings. Investors have described 3D property tours as a productive alternative during COVID-19. However, it also is important to note that investors recognize that conducting due diligence in the current climate is constantly changing and best practices are still evolving. Investors and consultants shared their insights with Alliance on current practices and views on what has been most effective in introductions and due diligence.
Key Survey Findings:
Prior to COVID-19, investors relied heavily on in-person meetings to conduct due diligence on an investment manager. More than half of investors (59%) conducted due diligence mainly in-person, while 23% used a combination of in-person and virtual meetings before the pandemic began. A minority (12%) said they relied mostly on virtual meetings with some in-person follow-up.
The majority of respondents (72%) expect investor and manager interaction to return to normal in the future when the risk of contagion from the coronavirus subsides. However, 22% believe that all organizational level due diligence will be completed virtually in the future, with only property tours conducted in-person. Those who think due diligence will become 100% virtual remain in the minority at 6%.
Survey respondents had mixed views on how managers could enhance the first introduction with investors. Thirty-nine percent said that an in-person, in-office introduction was the best approach, while 28% prefer an introduction via a virtual platform; twenty-two percent want the manager to send a short video clip introducing the team and strategy; and 11% said it is best to send marketing materials and wait for the investor to initiate contact.
Fifty-six percent of respondents said, “Yes! I can't wait to attend the next in-person conference”. That percentage is encouraging given the survey was conducted in October, and news of an effective vaccine had not yet been announced. Not surprisingly, there is still a fair amount of caution surrounding large gatherings. One-third of investors said they would prefer to interact with the managers through one-on-one meetings rather than conferences, and 11% said they would rather conduct conferences virtually only.
Clearly, the pandemic accelerated the use of technology. Many of the new tools and processes that brought added efficiency to the due diligence process are likely here to stay. When asked what innovation could be most useful over the long-term when completing due diligence on a new manager, investors rated robust data rooms as the most significant with the highest average score. Other innovations in order of importance included introductory videos introducing the team and strategy, updated research and whitepapers on the strategy, virtual property tours, virtual office tours and an automated subscription process.
10 Takeaways on the Potential Lasting Impacts for the Investor/Manager Experience:
Investors have a stronger preference for video calls over phone calls.
Early-stage due diligence may trend towards remaining virtual, while in-person meetings will remain a critical component of later stage due diligence.
Established managers who are well known and have an abundance of relationships could experience a larger trend towards virtual due diligence as investors analyze cost savings from travel expenses and time opportunity cost.
There is likely to be a higher reliance on consultants for analysis and expertise on the managers undergoing due diligence in virtual settings.
COVID-19 questionnaires are becoming standard in DDQ.
The increase in video footage for office tours or property tours will not replace in-person meetings, but they will be valuable for introductory purposes.
A small number of investors believe manager due diligence can be accomplished completely and efficiently through virtual settings, but do not believe the same can apply to property due diligence.
In an environment of rapid change and knowledge sharing, the use of updated research, whitepaper and third-party backing are critical to investors as they seek to properly analyze opportunities.
In addition to COVID-19, other political unrest that has been experienced in the United States has put substantial pressure on ESG and DEI policies and procedures.
Investors believe a robust data room will be the most useful tool moving forward for due diligence, followed by an introductory video introducing the team and investment strategy.
Future Manager Due Diligence May Follow a Hybrid Approach
Even with an effective vaccine, there continues to be lingering uncertainty on just how quickly people will resume travel, in-person meetings and large conferences. Overall, it is important to note that most investors do not believe sufficient and complete due diligence can be accomplished 100% virtually. That belief will increasingly require managers to throw out the one-size-fits-all approach and embrace a hybrid strategy and innovate along the way. To gain attention from the investor community, managers must broaden their toolkit and engage investors both in-person and virtually through a variety of different media.
About Alliance Global Advisors
Alliance Global Advisors is a women-owned consulting firm focused on empowering the institutional investment community to elevate best practices. Advising clients with approximately $80 billion in assets under management, Alliance partners with organizations to provide an independent perspective and innovative approach to critical strategic initiatives. Our partnerships allow senior management teams to focus on what matters most: diligently managing client capital, creating value and delivering exceptional returns in a performance-driven market.
Disclaimer: This blog was originally published on November 30, 2020 and will be updated periodically to reflect changes in the industry. The content may contain or cite personal and/or professional opinions that differ from the views of Alliance Global Advisors.