Private Equity Cash Turns Off Some Clients, Mutual Fund CEO Says

(Bloomberg) -- Institutional investors are starting to turn away from private equity real estate and infrastructure investments in favor of liquid funds that put their money to work faster, according to the head of a firm that offers such products.

“That’s a first,” said Robert Steers, chief executive of Cohen & Steers Inc., whose firm oversees about $63 billion in mutual funds and other liquid vehicles. Shares of the firm rose more than 21 percent over the 12 months through April 18, the biggest gainer in a Bloomberg index of asset managers.

Cohen & Steers competes with some private equity firms because it focuses on publicly traded investments in real estate and infrastructure such as real estate investment trusts. REITs can offer plausible liquid substitutes for privately held real estate assets, while it’s hard to find a similar proxy for traditional buyout funds, according to David Fann, chief executive officer of TorreyCove Capital Partners, a private equity consulting firm.

Private equity firms are driving up the cost of deals as they raise money faster than they can spend it, stockpiling a record $1.26 trillion in undeployed capital as of March. About $500 billion of the dry powder was raised for real estate and infrastructure projects.

As a result of all the money pouring in, the earnings gap between public and private funds has narrowed, Steers, who co-founded the firm, said in an interview. Rather than wait to deploy their capital in private funds, some institutions are moving to mutual funds and other public vehicles that offer exposure to similar assets, Steers said.

“As dry powder piles up, inevitably that creates a floor or a support level for listed real estate companies,” he said.

German Mandate

Steers cited a prominent German institution, which has historically invested only in closely held real estate and infrastructure. It will disclose a mandate in about two weeks of approximately $500 million to Cohen & Steers, part of a multibillion-dollar allocation to asset-management firms. He declined to name the client as the information is private.

Steers said Middle Eastern institutional investors are also allocating more to public funds because private equity returns are narrowing.

Private equity buyout funds returned 14 percent annually over the past five years compared with 11.6 percent for private equity real estate funds, according to Cambridge Associates. Annualized returns for an index of REITs over the period was 9.7 percent.

While waiting for their money to be called by private equity funds, investors typically hold the cash in liquid assets such as stock index funds, said TorreyCove’s Fann.

“It’s not a perfect correlation,” Fann said in a telephone interview. “The risk-reward profile varies dramatically for private equity -- and infrastructure -- so there’s been generally not a good public market proxy for it.”

Cohen & Steers had net inflows of $1 billion in this year’s first quarter, the New York-based firm reported April 18, following $1.2 billion in net outflows in last year’s fourth quarter. After the earnings release, the shares gained 2.3 percent to close at $48.28, the highest since June 2007. The stock is up about 40 percent this year as of 2:26 p.m. in New York.

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