What to watch out for when choosing a fund manager

When investing into real estate debt, choosing the right fund manager is crucial to the success of your investment. As private credit has been increasingly popular as an asset class and a number of new funds are coming onto the market, choosing the right manager has become even more pivotal. Here are some key factors to consider when choosing a fund manager for your real estate debt investments.

Defined Investment Criteria

A reputable fund manager should have a clear and well-articulated investment strategy and defined investment criteria. This includes:

• Target Market: Understanding the geographical and sectoral focus of the fund. Does the manager specialize in commercial, residential, or mixed-use properties? Is there a preference for urban centres or emerging markets?

• Loan Types: Clarify the types of loans the fund invests in—be it senior debt, mezzanine financing, or bridge loans. Each comes with its own risk and return profile and have different positions in the capital stack for being repaid.

• LVR Ratios: Look at the Loan-to-Value Ratios (LVR) the manager employs. Conservative leverage and reasonable LVR ratios are generally indicators of prudent risk management.

Robust Risk Management Practices

Like any investment, effective risk management is critical. A competent fund manager will have robust systems in place to mitigate potential risks:

• Due Diligence Process: The depth and rigor of the due diligence process can significantly impact the quality of the loan portfolio. Assess the manager’s ability and processes to evaluate borrower creditworthiness, property valuations, and market conditions.

• Monitoring and Reporting: Continuous monitoring and management of the loan portfolio is crucial. This includes tracking loan performance, managing defaults, and maintaining transparency with investors.

• Diversification: Diversification across different borrowers, property types, and geographic locations can reduce risk. Check that the diversification strategy aligns with your risk tolerance.

Proven Track Record

The historical performance of the fund manager provides insights into their capability and reliability:

• Performance Metrics: Examine key performance metrics such as historical returns, default rates, and recovery rates. Consistent returns with low default rates are indicators of a successful track record.

• Market Cycles: Consider how the manager has navigated various market cycles, especially during downturns. Their ability to manage the fund through challenging times is a testament to their resilience and expertise.

• Experience and Background: The experience and background of the fund management team is vital. Look for a team with a solid track record and experience.

Alignment of Interests

Ensuring that the fund manager’s interests are aligned with those of the investors is essential for long-term success:

• Co-Investment: Managers who invest their own capital alongside investors demonstrate confidence in their strategy and a commitment to achieving positive outcomes, offering true "skin in the game".

• Fee Structure: A transparent and fair fee structure aligns the manager’s incentives with the performance of the fund.

By incorporating these considerations, you can ensure that your investment in a real estate debt fund is managed by a capable and trustworthy professional, paving the way for steady returns and capital preservation.