Managing risks unique to real estate investing
INSIGHT ARTICLE |
RSM partner Nate Ruey sits down with Privcap to offer insights on third-party risk in real estate and how institutional investors can monitor the risks of separate accounts.
Privcap: How does RSM help real estate investors assess and manage risk?
Nate Ruey, RSM: We advise our clients on risk management and help them to identify the key business processes and technology that they may be facing. We work with real estate limited partners (LPs) and general partners (GPs) to determine whether they have sufficient controls in place. This includes adding value to operating and compliance processes while at the same time anticipating evolving risk and regulatory compliance requirements.
Our team provides sound recommendations and best practices based on our experience working with clients throughout the real estate industry. We help establish a strong foundation to ensure that the right governance and control structure is put in place to support their investors' strategic goals.
How do you work with managers to manage third-party risk?
Ruey: Our clients often outsource important processes to third parties. They sometimes think that when they do this, they outsource the risk as well. However, they still need to be able to monitor those third parties to make sure they are delivering what they agreed to deliver in the terms and conditions of the agreement. We can help with this important verification and monitoring process.
You also help institutional investors monitor the risks of separate accounts. What is behind the rise of separate accounts and what are their unique risks?
Ruey: There is a greater interest among institutional investors in separate accounts, as these hold the potential for greater returns, thanks to lower management fees. Separate accounts are different because the institutional investor directly owns the underlying assets or entities. Separate accounts are also unique in that each of the entities may have different businesses, asset classes, operations and advisors/management teams.
The separate accounts we tend to work with are advised by very recognized real estate advisory firms that have robust processes and controls in place to assist institutional and pension fund investors in managing risk. However, even the best control environments are susceptible to the complexity and interpretation of documents and third-party influences such as outside property managers.
Institutional investors want the entity’s advisors and management team to focus on executing strategy while ensuring the oversight and checks and balances are in place. Because of that, investors need to make sure that the entity’s infrastructure is set up properly, with correct oversight and accountability, and appropriate controls, policies and procedures are in place.
In order to achieve this, institutional investors are establishing specific control guidelines to make sure these investments are protected from governance, financial, fraud, information technology, reputation and security perspectives. The separate accounts are then periodically monitored to assess whether they are in compliance with the control guidelines. In establishing this programmatic oversight, we provide investors with more comfort that the separate accounts are operating under a sound control environment.
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