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Emerging fund managers: Corporate governance and ESG

INSIGHT ARTICLE  | 

As the real estate market is poised to welcome new investors, RSM has put together a guide for emerging fund managers. Learn more about the steps, strategies, structures and compliance to consider when launching a new fund in our emerging real estate fund series.

KEY TAKEAWAYS

  • Investors expect clear corporate governance policies for the fund.
  • Corporate governance policies should be reexamined regularly.
  • ESG initiatives are increasingly important to investors
  • Funds need a way to communicate their ESG commitment.

Emerging funds should establish and demonstrate their corporate governance—rules, practices and processes by which their fund is directed and controlled—to convey to investors their commitment to running a professional, responsible organization.

“Today’s investors really care about whether a fund is governed correctly, and whether it has the appropriate mechanisms in place to oversee the funds in a responsible manner,” RSM Real Estate Senior Analyst Sarah McKevitt says.

Among the best practices she recommends are including the mission or values statement on the fund’s website and in marketing materials to convey a commitment to transparency, and establishing written policies for valuation compliance and cybersecurity. Reassessing those policies on a regular basis is also important, McKevitt says.

Consider the growing influence of ESG

Against the backdrop of heightened public concerns around the environment, fair trade and social equity, ESG—environmental, social and governance—considerations are now at the forefront for many businesses, and real estate is no exception.

“Whether you're trying to attract retail investors or institutional capital, these investors are viewing ESG to be a core part of their due diligence process,” says Scott Helberg, a senior real estate analyst for RSM.  “They're not only looking at the financial returns of their investment but also the societal impact.”

Troy Merkel, RSM Partner and Senior Real Estate Analyst says having an ESG story embedded in the go-to-market pitch can greatly help with raising capital. “A lot of the major shops have a significant ESG component when they're going to market to fundraise,” he says.

Meanwhile, the importance of ESG to the middle market is rising, RSM’s data show. Some two-thirds of middle market organizations already had formal plans to showcase their ESG initiatives, according to the third-quarter RSM US Middle Market Business Index survey, which polled executives at midsize companies on ESG and climate-related issues. Among retail investors, millennials have consistently stressed the importance of social impact. Given that they are expected to inherit $35 trillion of assets over the next decade, Helberg says it’s imperative that funds demonstrate their commitment to ESG.

“The largest real estate managers and investors have already publicly committed to having an ESG focus,” Helberg says. “For example, many are targeting their investment portfolios to have net-zero gas emissions by 2050. With the mission starting from the top, it’s going to continue to trickle down, particularly to our middle market clients.”

For middle market clients—most of whom do not have internal staff dedicated to the ESG function—the hardest part about ESG initiatives is knowing where to start. RSM works with both emerging and established real estate funds to help develop ESG tracking methods, reporting frameworks and long-term goals.

This article was originally published in partnership with Bisnow.

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