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Government Investment Funds: Investment Strategies in the Alternatives Space
real estate private equity funds managed by
leading asset managers, b) JVs with leading
real estate developers and operators and c)
direct investments in assets with the aid of
leading real estate brokers, who can not only
assist in the initial diligence but also in on-
going management of the assets. Of the three
approaches, an investment in a third-party
fund was a well-planned way for GIFs to rely
on the expertise of an established investment
manager with a solid track record; however,
all things being equal, GIFs face the highest
fee structure with this approach. Alternatively,
JV investments alongside a reputable partner
provide an advantageous option over the
first instance, as it is less expensive and
establishes a platform for future co-investments
often at improved economics. However, it
is still encumbered with management and
development fees and requires some internal
staff at GIFs to diligence each JV opportunity.
Finally, direct investments in assets require
significant build-up of internal teams with
the capabilities to source investments and to
manage the day-to-day oversight of the asset.
In recent years, many GIFs have bypassed
investments in third-party funds and have
focused on investing either through JVs or
directly. We expect this approach to be adopted
by more GIFs in the future.
In terms of asset type, we believe that the
majority of new entrants will continue to invest
in operating prime office, retail and signature
hospitality assets and will limit their exposure to
residential and developmental risk, as the latter
two generally have a higher risk profile. North
America, Europe and, increasingly, Asia will be
the most attractive regions; however, as returns
continue to compress, given competition for
available assets, GIFs could attempt to get
exposure to secondary cities and emerging
markets with the help of strong local partners.
The larger GIFs could also expand their risk
appetite and participate in development
projects, albeit with a reputable sponsor.
Private Equity
Historically, GIFs gained initial exposure to the
Private Equity asset class through investments
as Limited Partners in third-party Private
Equity funds. As many of these GIFs became
more seasoned and experienced in Private
Equity investing, many decided to participate
in individual deals, using their co-investment
rights, which had the benefit of both deploying
larger investment dollars as well as incurring
lower management fees and carried interest.
More recently, many of these GIFs have
developed the same internal capabilities as the
fund managers themselves and have started co-
underwriting transactions and are investing less
in Private Equity funds.
That said, we believe the smaller, newer GIFs will
continue to rely primarily on third-party fund
managers to get exposure to the space as well
as to access co-investment opportunities, but
some of the larger funds will look to establish
internal teams to make direct investments,
albeit alongside proven third-party funds or
strategic operators. The largest of these funds
may look to compete directly with their prior
fund managers, as they look to lower fees or
to avoid them entirely. Additionally, they may
try to obtain market access themselves so that
they can have more discretion on new deals
and have an ability to put significant amounts
of capital to work, rather than having to share
with several parties who may be investing in the
same transaction.
Infrastructure
While many GIFs have invested in infrastructure
for more than two decades, this asset class had
seen limited new entrants to the space, given
the lack of high quality assets and complexity
of the investment process, due to the political
and regulatory drivers of the sector. However,
recent interest in infrastructure ignited as
Citi has
a local
presence
in over 100
countries,
and has
partnered,
across a
range of
Corporate
and
Investment
Banking,
Markets and
Transaction
Services
products and
solutions,
with most of
these GIFs
from their
inception.