Private equity gets a lifeline for research

Todays Best Free Real Estate Investment book for Boomers

By Martin Arnold

Published: October 13 2008 10:20 | Last updated: October 13 2008 10:20

Many private equity executives grumble about their poor public image, but most do little to fix it. Jeremy Coller, head of one of the UK’s biggest private equity groups, is putting his money where his mouth is with a multimillion-pound donation to London Business School to bolster public understanding of his industry.

The credit crunch has made life much tougher for private equity. But Mr Coller of Coller Capital says the industry is here to stay. He argues that academic research into private equity – still a nascent field – has a big role to play in the growth and evolution of his profession.

Mr Coller’s £3m-£8m ($5m-$14m, €4m-€10m) donation – from his family foundation, not his firm – is designed to cement the place of London Business School’s private equity institute as the world’s pre-eminent centre for teaching and research in its field.

“We want to learn more about ourselves in the industry and to have more case studies,” says Mr Coller.

Created four years ago with financial support from Coller Capital, Barclays Wealth, and the law firm Kirkland & Ellis, London Business School’s Private Equity Institute is one of the biggest in its field, with 340 students signed up to join the course this year. It will be renamed the Coller Institute of Private Equity.

“To make a more sophisticated market, there needs to be more academic research,” says Mr Coller, who last year raised $4.8bn for the world’s biggest secondaries buy-out fund, purchasing second-hand private equity interests from other investors.

The Coller Capital boss dismisses the idea that the credit crunch has sounded the death knell for private equity. “It is foolish to say this is the beginning of the end. We are right at the beginning of private equity,” he says.

He believes private equity – the use of long-term capital from investors and loans from banks to buy companies with the aim of selling them a few years later for a higher price – would be more popular with the public if it were better understood.

By investing money for pension funds, insurers and asset managers, Mr Coller says, private equity is “democratising wealth” by allowing millions of pensioners and savers to replace the church and aristocracy as the biggest owners of private assets.

“[It’s] moving from ownership by the few to ownership by the many,” he says. “What the man in the street needs to realise is that they can take ownership of their pension fund.”

Ambitions

Eli Talmor, the professor chairing the Coller Institute of Private Equity, says the donation secures its long-term future and will allow it to be more ambitious in its research projects and in developing case studies.

“We have been working on a shoestring and this money will give us the stability and ensure we are around for ever,” says Prof Talmor. “This will allow us to do more ground-breaking research and to organise further events around private equity.”

Demand from students to study private equity is still high, says Prof Talmor, who gained first-hand experience of venture capital as a board member of a ­Nasdaq-listed software company while teaching finance at the University of California, Irvine, during the 1990s.

He says 16 per cent of students applying to London Business School want to join private equity. “I don’t think the party is over,” he says. “This is an asset class that is here to stay. I cannot imagine it fading away.”

The private equity club is the biggest of London Business School’s professional clubs, with 2,000 members who attend workshops and speeches by industry figures and even do due diligence on entries for the annual BVCA/Real Deals private equity awards.

Prof Talmor says a “significant number” of students go directly into private equity, even though the industry tends to prefer more experienced recruits from investment banks, accountancy firms, management consultancies and corporate boardrooms.

Opportunity

Dismissing the idea that Mr Coller’s donation could encourage a sycophantic view of his industry in its research, Prof Talmor – who appeared at last year’s parliamentary inquiry into private equity – says it will not shirk from criticising buy-out groups when needed. “We like to have things in the open, it is more fun that way,” he says.

Coller donation is icing on the cake

The multimillion-pound donation by Jeremy Coller is the icing on the cake for London Business School. In the year to July 31 2008, dean Robin Buchanan scooped in £8.9m in cash and commitments from students, alumni and donors, writes Della Bradshaw. The money is largely earmarked for professorial chairs and research and includes the biggest class gift ever at LBS – £752,000 in pledges given by graduating students.

But, compared with US schools, LBS’s donations are chickenfeed. In 2007, Harvard Business School received $56m in gifts. Wharton school at the University of Pennsylvania is running a campaign to raise $550m. At Darden school at the University of Virginia, 96 per cent of the graduating class of 2008 made a pledge to raise money. The class has committed to give $123,515 – about $370 per student.

LBS has few rivals for the title of the world’s leading private equity school. It claims to be bigger than its US competitors – the Hicks, Muse, Tate & Furst Center for Private Equity Finance at the University of Texas at Austin and the Tuck School of Business at Dartmouth.

Elsewhere, Josh Lerner at Harvard Business School has become a leading authority on private equity and teaches an elective on the subject as part of its MBA course.

In the UK, Cass Business School has established a private equity research centre, while Oxford University’s Said Business School offers a private equity course with the Chartered Financial Analyst institute.

Mr Coller says London is well placed to catch the next wave of private equity growth in emerging markets. “All emerging markets are suffering from skills shortages in private equity and that is a great opportunity for London Business School,” he says.

As well as redressing private equity’s poor public image, Mr Coller says, his donation is aimed at helping his industry to learn from its mistakes. “It is a growing industry. We are just at the beginning and there is overpayment in our industry, as anyone working in private equity so far has been a pioneer.”

Mr Coller has invested heavily in venture capital, the smaller end of private equity that invests in early-stage start-up companies, both through his fund and personally. But he admits the VC industry is struggling in Europe. “Clearly there needs to be work done on venture capital in Eur­ope: it is just not working.”

But overall he is confident that as academic research helps to better the public’s understanding of private equity, its image will improve. “It is inevi

“Irrational Exuberance” Coaching For Boomers Author Explains Real Estate Crisis And How to Avoid Another. Article from: M2 Presswire Article date: September 9, 2008 More results for: Global Macroeconomics Real Estate

M2 PRESSWIRE-9 September 2008-Yale University: “Irrational Exuberance” Author Explains Real Estate Crisis And How to Avoid Another(C)1994-2008 M2 COMMUNICATIONS LTD

RDATE:08092008

New Haven, Conn. — If the current real estate crisis is to be resolved and a recurrence prevented, there need to be major changes both in the marketplace and in the behavior of individual investors, explains Yale economist Robert J. Shiller in his new book, The Subprime Solution: How Today’s Global Financial Crisis Happened, and What to Do about It.

In this work, aimed at a general audience, Shiller explores the subprime mortgage crisis from its development in the early 2000s to the threat it now poses to financial markets around the world. He cites both economic and social factors as contributory causes of the crisis, and offers a list of possible solutions to the problem.

In his best-selling book, Irrational Exuberance (2000), Shiller, the Arthur M. Okun Professor of Economics, examined speculative bubbles in the stock and housing markets. Now expanding on that analysis, The Subprime Solution demonstrates how the recent economic boom and increased speculative thinking in the United States real estate market led to an epidemic of risky investing and false security. This, in turn, helped to bring about the current economic downturn, says Shiller. Understanding the reason for the decline, he argues, might be the key to restoring and maintaining market stability.

“It is time to recognize what has been happening and to take fundamental steps to restructure the institutional foundations of the housing and financial economy,” declares Shiller, who advocates an aggressive response to the current dilemma. The short- and long-range plans he recommends are aimed to end the present financial crisis quickly while also preventing another one from occurring.

Shiller draws a connection between social behavior and financial decision-making, and underlines their mutual influence over each other. Accordingly, he places as much responsibility for the subprime situation on human behavior as on market forces. “It is the change in thinking about ourselves that is the deepest cause of the bubble and may be the slowest to unravel,” contends Shiller.

The Yale economist’s proposals for overcoming the current crisis range from government-funded bailouts for the least advantaged members of society to the creation of more planned urban centers to the establishment of a new organization modeled after the New Deal-era Home Owners Loan Corporation (HOLC). All of these proposals, Shiller asserts, would help restore what he terms “rightly placed” confidence in the market.

Shiller also argues for the creation of a new information infrastructure to teach people how the market operates while encouraging them to borrow, save and spend responsibly. Such a program could be the key to preventing new crises, he reasons.

Other proposals he puts forth include a new system of economic units of measurements to ensure standardization across the market, the establishment of a new liquid market for real estate, and home equity- and livelihood-insurance.

Robert J. Shiller is a member of the Cowles Foundation for Research in Economics at Yale and professor of finance at the International Center for Finance at the Yale School of Management. He specializes in the fields of macroeconomics and finance, behavioral economics and real estate.

The Subprime Solution: How Today’s Global Financial Crisis Happened, and What to Do about It has been released by Princeton University Press.

CONTACT: Dorie Baker, Yale UniversityTel: +1 203 432 8553

((M2 Communications Ltd disclaims all liability for information provided within M2 PressWIRE. Data prepared by named party/parties. Further information on M2 PressWIRE can be obtained at http://www.presswire.net on the world wide web. Inquiries to info@m2.com)).

International Lessons on Real Estate

If you think it’s hard to sell real estate in America today, take a lesson from the Continent. After spending four days with the Leading Real Estate Companies of the World in Rome, it’s become pretty clear that most American real estate agents have it “too easy.” Just try running your business when selling homes with “verbal commitments that are binding but broken without cause or recourse” and “you have six months to close” is the norm.

It’s about time American REALTORS figured out just how good they really have it.

Yeah, yeah, so the market is soft. So credit is “restricted.” So you have a bunch of listings that are overpriced. Look, at some point, you’re going to face a simple choice: Start taking advantage of the systems and tools at your disposal to do it right; or decide to move on. Let’s face it. We make real estate much harder than it has to be. As a whole, we are still on track to sell 5 million homes this year, a number which, in 2000, was about the same, and NAR hailed that year as “the best year in real estate in a decade.” And we’re right back to about the same number of agents at that time, with lots of available inventory. The “average” REALTOR still made about $46,000 (and most of those people are really “part time”). The top 10% of the industry made well over $100,000 - and they didn’t need a four-year degree or even a Blackberry. Most agents get tons of services, technology and support thrown at them by their brokers. Training that’s free. Advertising they don’t pay for; and leads they never worked to generate. And what do most brokers get in return: Listings that cannot be sold; online photos that look worse than a highschooler MySpace page and agents whining that the “consumer didn’t email them back right away.”

Gimme a break.

Any time American REALTORS think it’s pretty hard to sell real estate, go try it in Europe. Last week I was honored to be asked to deliver the Keynote address for the Leading Real Estate Companies of the World international symposium. Delivering our “Real Estate, the Next Generation” course to European, Asian and African brokers was an exhilarating challenge - because it forced me to update our research and look at their brokerage industries from the outside in (and sometimes inside out).

What’s clear is this: If American brokers want to beef-up their sales force, they should really start recruiting agents from abroad.

Here’s why: In many countries, making sales is done “the hard way.” No lockboxes. No MLS. No cooperation agreements or compensation offers. We’re talking good, old fashioned sales. Agents show up to their showings. Brokers “assign” customers to agents, who have to actually follow up and work with them. Becoming part of a company is an honor for the agent, not a favor to the broker.

This doesn’t mean that European or Asian brokers don’t have lots of technology at their disposal: On the contrary, their cellular technology and websites make far too many American brokerages look like they’re still paying with rocks and sticks.

Yet a major difference in how things work in so many of these companies is that the focus in on doing your job, developing a relationship, making a sale - with about 1/100th of the support from the “real estate community” that most agents in America take for granted. Some examples include the fact that most brokerages sell their own listings abroad; not like here in America - where upwards of 65% of listings are sold by “the other guy from the other company” who finds the buyer for you. Likewise, data is much harder to come by: Not too many “hotsheets” or broker caravans are done abroad, so the job of marketing listings falls squarely on the agent and the brokerage. No “LinkedIN” or “ActiveRain” or even regional or city-wide listings databases. IDX? Is that some kind of driver’s license system?

Proportionally, agents also have far less protections. In some companies, sellers “list and de-list” their properties daily; listing agreements are “kinda real” in too many places, but mostly “agreements” of understanding. Commissions are certainly far lower - as a matter of percentage - and the average sale can take months just to do the “paperwork”. Some countries have so many “stages” of paperwork that you might think you were re-building the home, not just transferring it.

It’s also clear that international demographics are on the path to making things much harder for many countries to sell real estate. Too many countries have shrinking populations; which means new construction may give way to more renovation, but smaller homes (and therefore smaller prices and commissions) will force brokers to be exactingly efficient and financially sound. And while much has been made about American financial distress in the last few years, taken as a whole, the last half-century has been a real estate boom, underpinned by sound monetary policy and consistent property laws. Just try selling real estate in a country where everytime the coalition government changes, they rewrite the finance, ownership and international trade laws - not to play with monetary policy and taxation rates so whimsically, they virtually wipe out the entire real estate industry every decade or so.

International Real Estate is set to be the biggest and best investment market of the next several years. Tomorrow, it will make a great deal of difference where we live. But certainly not in the same sense as we now perceive it. Tomorrow we will live where the best real estate exists, where the least crime and repression exists, where population pressures have not decimated the environment and where business is encouraged and not hindered by legislation. We will live there regardless of that place’s global location or it’s former political posture. If we can now buy a ranch in Argentina (or Uruguay, or New Zealand, or name your spot,)  for ten cents on the dollar of what a similar property inside the United States would cost us, and if we can carry on commerce from anywhere we are, how long do you imagine it’s going to take your neighbor to realize the very same thing? As one writer put it, “…those folks who buy that ranch in Argentina today are going to have grandchildren who will think they were a genius.”

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