Re fund manager market validation interview summary feedback final

Real Estate Investment and Funds Management
Operational and Infrastructure Challenges –
Summary Feedback from Market Validation Interviews

www.frontlinepartners.net
Summary of RE Fund Manager Market Validation Interviews

CONFIDENTIAL AND PROPRIETARY

1

Real Estate Investment and Funds Management
Operational and Infrastructure Challenges –
Summary Feedback from Market Validation Interviews

Table of Contents
Executive Summary

3

Introduction re Market Validation Approach / Discussion Topics

4

Operational Challenges and Industry Grievances (by Peer Group)
- Composite Rankings on Top Three Issues (by Peer Group)
- Key Interview Quotes on Top Three Issues
- Peer Groups Responses to Operational Challenges

9

Market Validation Commentary on Current Real Estate Software Market
- Key Interview Quotes
- Software Utilization Distribution (by Peer Group)

16

Market Validation Commentary on Back Office / Business Process
Outsourcing (“BPO”) and Funds Administration Solutions
- Expense Recovery Expectations

20

Appendix
- Prior Summary on Operational Challenges and Industry
Grievances
- Tabular Results of Top Three Challenges (by Peer Group)

23



2

Executive Summary
FrontLine Partners interviewed 16 fund managers and another 12 industry contacts to understand their
perspectives on the key operational and infrastructure challenges facing the real estate fund manager
today. Some of the key findings included:
» A number of respondents commented that our summary of industry grievances and operational challenges was among the
best they have seen. In each case, we asked participants for their top three operational challenges. While the results varied
somewhat by firm size, three main issues emerged:
»

Data collection, management and integration is the most common operational pain point, primarily due to the lack of
integrated solutions by the software market.

»

Complexity in financial accounting and investor reporting were nearly tied with the first issue, with key challenges on
waterfall / return computations and increased separate account reporting demands.

»

Gaps in software tools for portfolio analytics, what-if analysis and other forward looking tools hurt the ability of the
fund manager to conduct more effective portfolio management and improve transparency.

» Respondents confirmed our hypothesis that the real estate software market has been limited in its ability to deliver the required
solutions to the market, and many are increasingly looking at BPO / fund administration solutions.
» There is a sizeable gap in the real estate software market for real estate fund managers, with most respondents observing they
did not believe the software providers were meeting their needs, particularly in the realm of integrated solutions and forward
looking decision making tools.
» As a result, many firms spent relatively little (i.e. less than $1MM / year) on technology and complained the software market
firms were trying to put the customers (i.e. fund managers) on the hook for what should be industry level development needs.
» Real estate fund managers have intensified their use of outsourcing solutions and / or back office fund administration shops to
enable better back office functionality. However, the market depth and completeness of service offerings continues to be
somewhat of a challenge, as firms often work with multiple providers.



3

Introduction re Market Validation Approach and Discussion Topics



4

Introduction to Market Validation Discussion Topics
FrontLine Partners engaged with real estate investment management market industry executives regarding
market validation for the state of back-office and software solutions
Introduction
Engaged in an
Information Exchange
that will Promote
Education About
Operational Challenges
/ Industry Grievances /
Issues

Provided an Overview of
the Real Estate Fund
Manager Technology and
Services Market and
Shared Our Views

Our purpose is to share our view
of operational & infrastructure
challenges in the R/E fund manager
market, discuss state of software and
back-office solutions

Gained Understanding
of Industry Leader
Views About BackOffice and BPO
Solutions and Their
Place in Real Estate
Funds Management


Explored Firm’s
Relative Utilization of
Back-Office and BPO
Solutions in the Funds
Management Market


5

R/E Fund Manager Market Validation Interviewees
We interviewed 16 fund managers (7 large – over $10B AUM, 5 medium ($1B-$10B AUM) and 4 small
(<$1B AUM) plus an additional 12 other industry contacts. Interviewees were typically C-level or Managing
Director level resources at their respective firms. With exception of largest firms, most spent relatively little
on technology.
Respondent Distribution
by Fund Size ($ AUM)


Respondent Annual
Technology Budget ($M)


6

Original Hypotheses
Real estate software providers have not provided the depth of functionality required by institutional
investors. The software model has not been widely embraced and the market is open to new service
based solutions, from BPO and / or fund administration firms.
Original Hypotheses / Observations
» On the whole, software providers in real estate are not evolving quickly enough to meet the needs of the
money sources (e.g., REITs, fund managers and institutional investors). Software providers view the market
from a property management (asset) perspective and not a financial (cash flow or investment) perspective.
Additionally, the market is going global and most providers lack the financial resources to go global.
» REITs, fund managers, and institutional investors require more sophisticated analysis on cash flows and
investment positions / exposures. They want to achieve modeling capabilities that exist in equity and fixed
income markets. They do not currently have the tools or methodologies to analyze risk, evaluate what-if
scenarios, and conduct portfolio benchmarking and dynamic modeling.
» Current software providers are enabling real estate companies to do very basic investor reporting and income
distribution. They are not enabling the higher value modeling and portfolio management required by
institutional investors.
» Software providers see the growth in moving from property management to investment/portfolio management
in real estate and going global. We believe the real opportunity is providing those services and solutions to the
funds management firms and institutional investors.
» We believe a dedicated real estate funds administration / BPO firm focused on this market will enable
institutional investors and fund managers to continue to focus on activities that are higher value, than data
collection, management and reporting.



7

Market Validation Interview Conclusions

Overall, respondents confirmed our hypothesis that the real estate software market has been
limited in its ability to deliver the required solutions to the market, and many are
increasingly looking to BPO / fund administration solutions as an option.

Conclusions

Hypothesis
Significant operating and infrastructure
challenges continue to vex an industry,
grown substantially by “deal guys” with
less expertise in back office operations.

Key challenges are: 1) Data collection and
management given lack of integrated
solutions; 2) Complexity in financial
accounting and reporting; and 3) Limited
portfolio analytical tools for transparency

There is a sizeable gap in the real estate
software market for fund managers, with
fund managers looking for more
integrated solutions and decision tools.

Respondents noted that the industry still
suffers from a lack of integrated solutions,
and forward looking tools. Many complained
that customers are “on the hook” for industry
level development needs.

Real estate fund managers are
increasingly looking at their back office
operating models for more robust
functionality and integrated solutions.

Outsourcing usage has intensified to meet
back office needs as many firms re-examine
their operating model, even including shared
service centers, re-badging and lift-outs (e.g.
Morgan Stanley to State Street)



8

Peer Group Responses to
Operational Challenges and Industry Grievances
» Project Framework and Timeline
» Project Methodology and Approach
» Key Document Section Description


CONFIDENTIAL &PROPRIETARY

9

Ranking of top three operational issues by fund manager size
Legend: (1) Data Standards, (2) Data Collection, Management & Integration, (3) Operational Hand-offs & Processes, (4) Complexity in Financial Accounting and Reporting;
(5) Portfolio Risk Management, Reporting & Transparency; (6) No response – See APPENDIX for original content description and tabular results by size

Total
Across All
Firms

Large Firms
(over $10B
AUM)

Medium
Firms ($1B$10B AUM)



Small Firms
(Under $1B
AUM)

10

Key Market Validation Interview Quotes re Key Operational Issues
Data collection, management and integration with various software platforms and business management
needs appears to be the largest operational pain point in the industry
2

Key Interview Quotes
Data Collection, Management & Integration

» “Data management is their largest issue; however, it is very important to define what you need and to be precise as to
definitional standards otherwise, you still have challenges with the reliability and consistency of information.”
» “Biggest challenge was in reporting, taking the data and converting it from data at the operating level to manage the
business.”
» “Data aggregation is a huge issue in continental Europe; no one service provider to get the data into central and
conforming basis - very unlike the US and UK markets which are more mature. In these countries, lots of smaller
operators and they won't invest in these type of reporting software solutions; therefore 'cry out' for data and consistency.
Most of these firms use Excel.”
» “Data management, collection and usage of that data is their biggest challenge - if you have the data, felt that you can
alleviate a bunch of these issues; however, they really struggle to get their hands on the data in timely manner.”
» “Controller is spending 90% of his time, chasing down data, need the right expertise to know how / where to get it, but a
lot of time / energy to capture this information every month. Commented that CFO is doing about 75% of CAO job, and
down from CAO to controller because of this data management challenge. These levels should not be spending this
much time / energy simply in data capture efforts.”
» “System integration - not knowing if you can get all the key information / flows into one system or have it communicate
well between the various platforms.”
» “Lack of integrated software or solution provider(s) - software, expertise and delivery platform of capabilities or
solutions.”
» “Struggle with the integration of accounting, reporting and data repository for all this.”
Note – Comments herein were taken from individual market participants and reflect feedback /
observations in the market, not necessarily the view of FrontLine Partners.



11

Complexity in accounting and reporting for varied deal structures (i.e. promotes / waterfalls) along with
increasing demands for investor reporting (particularly with separate accounts) represent the second
largest set of operational pain points in the industry.
4

Complexity in Financial Accounting, Investor Reporting

» “Growth in number of legal entities and the complexities in accounting for multiple entities, reporting. Note every deal
requires different reporting, for different investors and some cases different accounting requirements.”
» “Complexity of financial accounting, reporting and waterfalls continue to be challenge (as every deal is pretty unique).”
» “Key distinctions between partnership level accounting for profits, cash flows, waterfalls, etc. versus the fund level
accounting.”
» “Sees tremendous friction in investors who are big on separate accounts as part of their strategy and wanting that level
of reporting / access to that level of reporting when they are in a fund strategy.”
» “Investor reporting has become more intensive - key financial metrics, some questions on who gets what level of
information whether it was requested or not / highly sensitive area.”
» “Separate accounts investor report production horribly clumsy effort for them (e.g. IT pulling data, dashboards,); also
investor changing demands on timing, what to report, what level, etc.”
» “Investor reporting is a key challenge to take all the data and analytics to get it to the "pretty” state.”




12

Overall, interview respondents validated the need for more robust solutions in the portfolio risk analysis
and decision making tools for forward looking analytics vs. reporting. This not only drives ability to improve
returns through better portfolio management, but also improves transparency.
5

Portfolio Risk Management, Reporting & Transparency

» “Fund forecasting and what-if analysis, rollups have been a big challenge.”
» “Reporting and transparency tend to be more static type analysis; whereas the portfolio risk analysis needs to be
more dynamic - they struggle with this.”
» “Analysis of the portfolio risk and enough tools which have emphasis on the forward looking / dynamic modeling and
impact assessment from various what-if scenarios, with resulting impact on the portfolio. Felt they could really see
more value out of this area, but spend so much time getting to the data.”
» “Really perceived a major lack of focus / tools and emphasis on the forward looking what if and decision making tools
to understand / act upon the portfolio risk by performing portfolio analytics in a robust scenario way. Need to do
more work in industry for analytical capacity to do the “what-if” across assets through to the fund / investor
positions...Be more forward looking vs. reporting oriented.”
» “They have difficulty really getting to the value add of their role as they spend a lot of time on either ad hoc
requests, or finding data to compile before they even get to the analytical (value add) review.”
» “Challenges in valuation and consistency in the application of valuation methodology and key assumptions.
Transparency increasingly becoming more of an issue - even in a fund format (vs. separate account) and even with
long term investors.”
» “Transparency has become more of a challenge - both in terms of internal management reporting and visibility to
performance, as well as for the external reporting matters.”




13

Industry Responses (by Peer Group) to Operational Challenges
Peers in the industry have responded differently as they scale operations.

Fund Size

Up to $1B AUM

$1B – $10B AUM

> $10B AUM

Industry Responses to Operational Issues
 Significant blurring of responsibilities between Property Operational Management (external
property manager or JV/Operating Partner), internal Asset Management and internal
Investment/Fund manager
 Asset Management tend to be hands-on with budgeting, leasing, aged receivables and
CAPEX
 Deal-driven structure means inconsistency in fund structures and deal types and terms
 Lack of technology support above the core accounting platform (generally reliant on Excel)
 Considerable manual duplication and dissemination of data to different teams
 Focus on improving key business processes: deal pipeline and approval, annual planning,
reforecasting, manager data collection, investor reporting
 Clarity on roles and responsibilities both within each fund and across business functions
 Investment in core technology: investment/fund accounting, performance management,
document management, deal pipeline (investment and lease), data management
(warehouse/repository)
 Introduction of centralized/shared services (HR, accounting, compliance, reporting) as well
as some outsourcing (fund and investment accounting, due diligence, modeling)

 Greater degree of outsourcing of non-core business processes around fund financial control
and reporting: financial reporting, investor statement preparation, investment control, asset/debt
reporting, fund waterfall, fund/investment statistics, investor questionnaires, valuation process
management; use of balanced scorecards to manage outsourcing providers
 Integrated processes between property, asset and funds management
 Integrated technology support reducing manual touch points and more streamlined flow of
information



14

Industry Responses (by Peer Group) to Operational Challenges
Peers reported varying levels of involvement in key business functions as they grew in size and complexity

< $1B AUM

Investor
Reporting

Heavy

$1B - $10B AUM

> $10B AUM
Heavy

Heavy

Outsource

Fund/Portfolio
Management

Outsource

Fund/Investor
Accounting

Outsource

Asset
Management

Budgeting /
Forecasting

Leasing

Property
Management

Light


Light


Light

15

Market Validation Commentary on Current Real Estate Software Market


CONFIDENTIAL &PROPRIETARY

16

Key R/E Software Market Validation Interview Quotes
With exception of a few large fund managers, most respondents didn’t perceive the real estate software
market firms as meeting their technology and functionality needs
Is the R/E Software Industry Meeting Your Needs?

» “No, the industry has moved on, however, software players are not where they need to be. There are a few of them, who are making movements
in the right direction. However, most are wanting customized development and it's prohibitively expensive to go that route.”
» “No, didn't feel anyone in the real estate software market could give a price point for products and solutions, all open ended / exposure to the fund
manager (customer).”
» “Generally not, felt there was a lot of point to point solutions in the market, and in some cases - vapor ware.”
» “Eight years ago, it seemed there was more focus on this, then it died down; seems to be making somewhat of a comeback.”
» “Believed Yardi was clearly out in front as they had the ability to invest. Saw MRI as challenged in the market due to their ownership issues. Felt
Argus / Altus had taken flack in the market (lot of griping) about Enterprise, but seemed to be moving in the right direction.”
Biggest Technology Challenges in the Market / Gaps in Current Technology Functionality

» “Major issue in the industry is that the systems don't communicate, they are all closed systems, Yardi database is very difficult to pull data out
once you have it in their system due to proprietary programming codes.”
» “Biggest challenge is the gaps in the systems and lack of system integration for the industry.”
» “Lots of challenges, biggest are in data management and the lack of integrated solutions in the market.”
» “Investment Management accounting and computations for such a large number of complex deals (separate accounts).”
» “There are gaps in the model and accounting for complex entities, structure, push down from capital call requirements; also gaps in the ability to
report transaction success record…another opportunity area that is pretty open in the investment management (using separate modules to model
the splits and return computations)and Investor reporting.”

Note – Comments herein were taken from individual market participants and reflect
feedback / observations in the market, not necessarily the view of FrontLine Partners.



17

Software Usage / Distribution by Peer Group (Still Evolving from an Excel World)

Legend:

Large Funds: Over $10 B AUM
Medium Funds: $1B - $10 B AUM
Small Funds: Under $1B AUM

Software Usage
Category

Property / GL Accounting

Vendor Name

Usage Distribution Percentages
Total
Large
Medium
Small
16
7
5
4

Yardi
MRI
CTI
JD Edwards
Great Plains
Microsoft Dyanmics
Horizon
Other - Bespoke
Other - SAP
Other - Peachtree

Total
16

Usage Distribution Count
Large
Medium
Small
7
5
4

Sum
Prev / under
Review

43.8%
31.3%
6.3%
0.0%
6.3%
12.5%
12.5%
6.3%
6.3%
6.3%

71.4%
57.1%
14.3%
0.0%
0.0%
0.0%
14.3%
14.3%
14.3%
0.0%

20.0%
0.0%
0.0%
0.0%
20.0%
20.0%
20.0%
0.0%
0.0%
0.0%

25.0%
25.0%
0.0%
0.0%
0.0%
25.0%
0.0%
0.0%
0.0%
25.0%

7
5
1
0
1
2
2
1
1
1

5
4
1
0
0
0
1
1
1
0

1
0
0
0
1
1
1
0
0
0

1
1
0
0
0
1
0
0
0
1

Fund / Investment Accounting AltaReturn
Analyst X
Efront
Investran
Excel
Other - Yardi
Other - Realogic
Other - MRI
Other - Sun (Europe)
Other - Hyperion (Asia)
Other - CTI

0.0%
0.0%
0.0%
18.8%
81.3%
0.0%
0.0%
12.5%
6.3%
6.3%
6.3%

0.0%
0.0%
0.0%
28.6%
85.7%
0.0%
0.0%
28.6%
14.3%
14.3%
14.3%

0.0%
0.0%
0.0%
0.0%
100.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%

0.0%
0.0%
0.0%
25.0%
50.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%

0
0
0
3
13
0
0
2
1
1
1

0
0
0
2
6
0
0
2
1
1
1

0
0
0
0
5
0
0
0
0
0
0

0
0
0
1
2
0
0
0
0
0
0

Investor Reporting

6.3%
0.0%
0.0%
6.3%
68.8%
37.5%
0.0%
0.0%
0.0%
0.0%
6.3%
6.3%
6.3%

0.0%
0.0%
0.0%
0.0%
57.1%
42.9%
0.0%
0.0%
0.0%
0.0%
14.3%
0.0%
14.3%

0.0%
0.0%
0.0%
20.0%
80.0%
40.0%
0.0%
0.0%
0.0%
0.0%
0.0%
20.0%
0.0%

25.0%
0.0%
0.0%
0.0%
75.0%
25.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%

1
0
0
1
11
6
0
0
0
0
1
1
1

0
0
0
0
4
3
0
0
0
0
1
0
1

0
0
0
1
4
2
0
0
0
0
0
1
0

1
0
0
0
3
1
0
0
0
0
0
0
0

AltaReturn
Efront
Investran
Netage
Excel
Word & PPT
Other - Asset Eye
Other - SAP Business Objects
Other - Cognos
Other - QlikView
Other - Yardi Voyager Portal
Other - Access Database
Other - Proprietary



4

2
4

1
1
1

18

Software Usage / Distribution by Peer Group Size (Still Evolving from an Excel World)
Software Usage
Category
Portfolio Analytics /
Management

Cash Flow, Budgeting and
Valuation point Solutions

Any data warehouse or data
mart usage?

Vendor Name

Usage Distribution Percentages
Total
Large Medium Small
16
7
5
4

Total
16

Usage Distribution Count
Large Medium Small
7
5
4

Sum
Prev / under
Review

Cougar
Taliance
Argus - DCF
Argus Dyna
Argus Enterprise
Resolve
Excel
Other - Yardi

6.3%
0.0%
62.5%
31.3%
6.3%
18.8%
81.3%
0.0%

0.0%
0.0%
85.7%
42.9%
14.3%
28.6%
85.7%
0.0%

0.0%
0.0%
40.0%
20.0%
0.0%
0.0%
100.0%
0.0%

25.0%
0.0%
50.0%
25.0%
0.0%
25.0%
50.0%
0.0%

1
0
10
5
1
3
13
0

0
0
6
3
1
2
6
0

0
0
2
1
0
0
5
0

1
0
2
1
0
1
2
0

2

Excel
Argus
Argus -Dyna
Cougar
Kardin
Other - Yardi Budget

68.8%
43.8%
12.5%
0.0%
12.5%
6.3%

71.4%
57.1%
28.6%
0.0%
14.3%
14.3%

100.0%
40.0%
0.0%
0.0%
20.0%
0.0%

25.0%
25.0%
0.0%
0.0%
0.0%
0.0%

11
7
2
0
2
1

5
4
2
0
1
1

5
2
0
0
1
0

1
1
0
0
0
0

1

6.3%

14.3%

0.0%

0.0%

1

1

0

0

62.5%

57.1%

80.0%

50.0%

10

4

4

2

Yes
Comments
No (0= N/A or no response)
Comments

1
2
1
5
3

Legend:
Large Funds: Over $10 B AUM
Medium Funds: $1B - $10 B AUM
Small Funds: Under $1B AUM



19

Real Estate Fund and Investment Management
Back-office BPO and Funds Administration Solutions
Usage and Implications for the Future



20

BPO Usage and Commentary
We generally found the industry interviewees had used BPO or outsourcing firms to one degree or another.
However, there were key concerns over market depth / completeness of providers as well as the capacity
(and passion) of such firms to support operations vs. simply process / support deal flow.
Industry Responses & Observations

Factor

Utilization

Concerns

Market Depth of
Providers

 Most felt our initial depiction of potential BPO services to be a little broad, but saw more potential
once we went deeper into the functional area (detailed slides) and differentiated control and
oversight vs. the whole functional area.
 Approximately half of respondents were in fact using some form of outsourcing or funds
administration support, ranging from transactional support work (e.g. due diligence, lease
abstractions) to a few who were using these firms as a recurring part of their operational support
needs (e.g. quarterly valuations, ARGUS updates and roll-ups, some finance and accounting)
 One firm had a captive BPO firm (due to parent relationship) and a couple had indicated they were
curious on the re-badging decision Morgan Stanley made in connection with State Street
 Four primary concerns were control, process, quality and expertise – all tied into reputation
 Communication flow (both internal and external) was viewed as another hurdle, particularly with the
BPO firms, unless they had on-shore client and / or process management
 Responsiveness, timeliness and in some cases a stronger passion to “Own” the issue, rather than
simply being pure processing shops
 Degree that the firm was supporting operational needs at the business and ability to swap out
providers / unplug the contract if and when needed (i.e. not locked into provider)
 Most were concerned simply to find reliable providers in key areas; didn’t perceive one firm can do
all this
 Concerns over State Street, Citco, JP Morgan (i.e. private equity / hedge fund administrators) trying
to migrate into real estate as they lacked critical real estate industry expertise
 Few commented that market is maturing and getting more service depth from providers
 Market providers viewed in three key categories – BPO firms with strong F&A (finance and
accounting) yet varying real estate, Real estate BPO firms who tended to be more transactional but
have moved into recurring work (including fund accounting) and pure fund administration firms.



21

Expense Recovery for Use of Third Party Firms / Providers
We generally found industry interviewees skeptical on the potential for expense recovery from investors by
using third parties, although expectations were higher for movement over time as providers deepen and
fund managers achieve clarity from their investor base and legal agreement review.
Industry Responses & Observations

Factor

Economics and
Materiality

Impact on Investor
Relations and Future
Capital Raise Efforts

Execution and
Reliability

 Some questioned how material these expenditures really are in terms of the potential recovery
from not offsetting the management fee
 Some highlighted that you may simply be making it more difficult to achieve performance /
promote hurdles (depending on how close to various thresholds you may be at)
 Concerns over how material an impact are the cost pass-through on final results
 Some mentioned that LPs were attuned to this and even have been asking advisors about this
practice
 Most did not focus on the whole re-badging opportunity - even when Morgan Stanley lift out
discussed - to push costs completely through to service provider
 Concerns raised over what investor expectations were in the original capital raise effort and
related marketing
 Generally a feeling that is what management fee is for, so are you essentially going to make it
harder to get a better management fee in the future by these tactics
 Short term gain at cost of longer term relationships / fiduciary representations
 Some believed they had support in legal agreements, but case by case basis
 Concerns over how material these costs may be and 'drag' on returns in a difficult environment
 Felt this criterion vastly out-weighed economic parameters, as firm’s name / reputation at stake
 Concerns over State Street, Citco, JP Morgan (i.e. private equity / hedge fund administrators)
trying to migrate into real estate as they lacked critical real estate industry expertise
 Few commented that market is maturing and getting more service depth from providers;
therefore expense recovery may become more accepted as fund managers use third parties



22

Appendix

Summary of Industry Operational Grievances / Issues (Prior Content)
Tabular Results of Top Three Operational Challenges (by Peer Group)


23

Operating Challenges / Industry Grievances (R/E Inv. & Funds Mgmt.)
A bewildering array of evolving industry standards creates challenges for data standards and consistent
industry definition sets or benchmarking
Key Operational Challenges and Industry Grievances
Operational Challenge
1

Data Standards

Industry Grievances or Issues
There are a variety of evolving industry standards – depending on scope
(i.e. accounting, tax, reporting, valuation, etc.); however no uniformly accepted
data definition set and consistent benchmarking.


Accounting treatments
 GAAP, FASB (13, 141, 157, 159, etc.)
 IFRS



Tax treatments & practices



Standard & influencing bodies
 NCREIF, NAREIT, NAREIM
 INREV, EPRA
 OSCRE, PISCES
 ALFI



Valuation mechanisms
 Indexes
 Lease-based DCFs



Performance measures & reporting
 NCREIF, etc.
 AMIR, AMIR Gibson
 IPD



24

Operational Challenges & Industry Grievances (R/E Inv. & Funds Mgmt.)
Data management challenges pose one of the largest time drains of highly paid fund management talent,
suggesting an opportunity for data warehousing and management
Key Grievances and Operational Challenges
Industry Grievances / Issues

Operating Challenge
2

Data Management
(Collection/Warehousing and Mgmt.)

Processes for collections and management of data which worked on small scale
are simply inefficient given size of industry
Talented, highly paid real estate personnel spend too much time chasing and
inputting data.
Credibility of data used to manage investments and report to investors is too reliant
on manual data entry with no (or limited) repeatable controls to assure consistent
treatment of the data.
Fund managers and their operating partners use an array of financial reporting
and property management systems.
 Systems include: MRI, Yardi, CTI, JDE and other systems
 Fund managers have to extract select information to run high level portfolio reports
to measure asset and fund level performance
Collecting and processing information from operating partners is typically
inefficient and cumbersome, with little real protocols followed.
 Complications / complexity stems from fund manager receiving data from multiple
heterogeneous sources (and systems) that don’t use same data process, data
requirements and /or data definitions.
Data consolidation and data integrity issues are common
 Principally due to manual consolidation of reports to portfolio level reports;
 Very little time for quality data analysis as majority of time in compilation



25

Operational Challenges / Industry Grievances (R/E Inv. & Funds Mgmt.)
The back-office support environment is woefully under-equipped for the significant growth in number of
funds and assets under management
Key Operational Challenges and Industry Grievances
Industry Grievances / Issues

Operational Challenge
3

Operational
Processes &
Hand-offs

4

Complexity in
Financial
Accounting /
Investor Reporting

5

Portfolio Risk
Mgmt. / Reporting /
Transparency

 Lack of integration, along with a proliferation of manual processes foster
complexity, threatens data integrity
 Manual processes are costly. The cost of the time and resources required
increases operating expenses and impacts the organization’s ability to meet growth
targets and focus on its core business – delivering financial returns to its investors
 Business processes are often inconsistent at the property level
 Limited to nominal sharing of industry best practices in any meaningfully coordinated
way at the industry level
 Growth in number and complexity of legal entities based on fund structures and
other factors has resulted in varying processes, policies and use of systems across
the fund manager organization with increasingly impacts the ability of the
organization to effectively report on critical information
 Dissimilar and manually intensive accounting, financial reporting and analysis
processes for fund operations impact the visibility across the portfolio / fund / firm’s
overall holdings. As a result, interaction with and responses to joint venture partners,
investors and analysts (if public) is affected.
 The industry must now manage risk – real and perceived – much more
aggressively. The loaded people cost (including hiring, training, retention and
management) to support the asset (risk) management function has become a large
operational expense.
 Return pressures over the past few years have caused more demands from investors
on the fund manager for greater transparency



26

Ranking of top three issues by fund manager size (Tabular format)
ISSUE RANKING BY FIRM SIZE
RANKINGS PER ORIGINAL CATEGORIES
1

2

PERCENTAGE DISTRIBUTION
CATEGORY REFERENCE NUMBER
3
4
5

NA

Port. Risk
Operational Complexity: Mgmt,
No
Data
Data Hand-offs/ Fin'l Acctg. & Reporting & Response
Transparency / Issue Total
Standards Mgmt. Processes Reprtg
Total Distribution (16)
Control check by count

Percentage by Firm Size
Large Firms (7)

Medium Firms (5)

Small Firms (4)

Ranking of 1
Ranking of 2
Ranking of 3

0.0% 43.8%
6.7% 33.3%
0.0% 12.5%

6.3%
6.7%
6.3%

43.8%
0.0%
43.8%

0.0%
40.0%
6.3%

6.3% 100.0%
13.3% 100.0%
31.3% 100.0%

Ranking of 1
Ranking of 2
Ranking of 3

0.0% 42.9%
0.0% 42.9%
0.0% 28.6%

14.3%
0.0%
0.0%

42.9%
0.0%
28.6%

0.0%
57.1%
14.3%

Ranking of 1
Ranking of 2
Ranking of 3

0.0% 80.0%
20.0% 20.0%
0.0% 0.0%

0.0%
0.0%
0.0%

20.0%
0.0%
60.0%

Ranking of 1
Ranking of 2
Ranking of 3

0.0% 0.0%
0.0% 25.0%
0.0% 0.0%

0.0%
25.0%
0.0%

75.0%
0.0%
50.0%


1

COUNT DISTRIBUTION
CATEGORY REFERENCE NUMBER
3
4
5

2

NA

Port. Risk
Operational Complexity: Mgmt,
No
Data Data Hand-offs/ Fin'l Acctg. Reporting & Response /
Standards Mgmt. Processes & Reprtg Transparency Issue Total
7
5
2

1
1
1

7

0.0% 100.0%
0.0% 100.0%
28.6% 100.0%

3
3
2

1

3

0.0%
40.0%
20.0%

0.0% 100.0%
20.0% 100.0%
20.0% 100.0%

4
1

0.0%
0.0%
0.0%

25.0% 100.0%
50.0% 100.0%
50.0% 100.0%


1

1

7

2

4
1

16
15
16

2

7
7
7

1
1

5
5
5

1
2
2

4
4
4

1
3
3

1

6
1

1
2
5

1
2

2
1

27

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