Harvard Case - Cause and Effect: Performance Attribution in Commercial Real Estate
"Cause and Effect: Performance Attribution in Commercial Real Estate" Harvard business case study is written by Craig Furfine. It deals with the challenges in the field of Finance. The case study is 22 page(s) long and it was first published on : Feb 9, 2017
At Fern Fort University, we recommend that The Carlyle Group adopt a holistic performance attribution framework to better understand the drivers of returns in their commercial real estate portfolio. This framework should encompass both quantitative and qualitative factors, including financial analysis, market trends, asset management strategies, and risk management practices. By implementing this framework, The Carlyle Group can improve decision-making, enhance transparency, and optimize portfolio performance over the long term.
2. Background
This case study focuses on The Carlyle Group, a global alternative asset manager with a significant presence in commercial real estate. The case highlights the challenges the firm faces in attributing performance across its diverse portfolio, which includes various property types, locations, and investment strategies. The firm's current approach, relying primarily on financial analysis and market comparisons, is deemed insufficient for fully understanding the drivers of returns and identifying areas for improvement.
The main protagonists are:
- Glenn Youngkin, Managing Director of The Carlyle Group, responsible for the firm's real estate division.
- Mark Riese, a senior member of the real estate team, tasked with developing a comprehensive performance attribution framework.
3. Analysis of the Case Study
The case study highlights the need for a robust performance attribution framework in commercial real estate. We can analyze the situation using the following frameworks:
1. Financial Analysis Framework:
- Financial Statements: The case emphasizes the need for a deeper analysis of financial statements beyond just returns. Ratio analysis (e.g., profitability, liquidity, and asset management ratios) can provide valuable insights into the performance of individual assets and the overall portfolio.
- Capital Budgeting: The Carlyle Group needs to evaluate the return on investment (ROI) of different projects and strategies. Net Present Value (NPV) and Internal Rate of Return (IRR) analysis can help determine the financial viability of various investments.
- Risk Assessment: The case highlights the importance of risk management. Identifying and quantifying risks associated with each investment is crucial for making informed decisions.
2. Asset Management Framework:
- Investment Management: The Carlyle Group needs to develop a clear investment strategy that aligns with its overall objectives and risk tolerance. This strategy should encompass asset allocation, investment selection, and portfolio diversification.
- Asset Management Strategies: The case emphasizes the importance of active asset management. This includes strategies like value-add, redevelopment, and property management to enhance the performance of individual assets.
- Technology and Analytics: Leveraging technology and analytics can significantly improve the efficiency and effectiveness of asset management. This includes data collection, analysis, and reporting to identify trends and opportunities.
3. Market Analysis Framework:
- Economic Forecasting: The Carlyle Group needs to consider macroeconomic factors that can impact the performance of its portfolio. This includes interest rates, inflation, and economic growth.
- Emerging Markets: The case mentions the firm's interest in emerging markets. Understanding the specific risks and opportunities in these markets is crucial for making informed investment decisions.
- Competitor Analysis: The Carlyle Group needs to monitor its competitors in the commercial real estate market. This includes understanding their strategies, performance, and market share.
4. Recommendations
To address the challenges outlined in the case study, The Carlyle Group should implement the following recommendations:
Develop a Holistic Performance Attribution Framework: This framework should encompass quantitative and qualitative factors, integrating financial analysis, market trends, asset management strategies, and risk management practices.
Implement a Standardized Data Collection and Reporting System: This system should ensure consistent data collection across the portfolio, enabling accurate and timely performance analysis.
Conduct Regular Performance Reviews: The Carlyle Group should conduct regular reviews of individual assets and the overall portfolio, using the performance attribution framework to identify areas for improvement.
Develop a Clear Investment Strategy: This strategy should define the firm's investment objectives, risk tolerance, and target markets. The strategy should be regularly reviewed and updated to reflect market conditions and changes in the firm's objectives.
Invest in Technology and Analytics: The Carlyle Group should leverage technology and analytics to enhance the efficiency and effectiveness of its asset management practices. This includes tools for data collection, analysis, and reporting.
Develop a Strong Risk Management Framework: The firm should have a robust risk management framework in place to identify, assess, and mitigate risks associated with its investments.
Foster a Culture of Transparency and Accountability: The Carlyle Group should create a culture that encourages open communication and accountability for investment decisions and performance.
5. Basis of Recommendations
These recommendations are based on the following considerations:
Core Competencies and Consistency with Mission: The recommendations align with The Carlyle Group's core competencies in financial analysis, investment management, and asset management. They also support the firm's mission to deliver superior returns for its investors.
External Customers and Internal Clients: The recommendations are designed to benefit both external investors and internal stakeholders. Improved performance attribution will enhance transparency and accountability, leading to increased investor confidence and better alignment between the firm's objectives and the interests of its employees.
Competitors: The recommendations will help The Carlyle Group stay ahead of its competitors by providing a more comprehensive and insightful view of performance. This will enable the firm to make more informed investment decisions and achieve superior returns.
Attractiveness ' Quantitative Measures: The recommendations are expected to lead to improved financial performance. By identifying and addressing areas for improvement, the firm can enhance its return on investment (ROI) and increase shareholder value.
Assumptions: These recommendations assume that The Carlyle Group has the resources and commitment to implement the necessary changes. The firm also needs to ensure that its employees are adequately trained and equipped to use the new performance attribution framework.
6. Conclusion
By adopting a holistic performance attribution framework and implementing the recommendations outlined above, The Carlyle Group can significantly improve its ability to understand and manage its commercial real estate portfolio. This will lead to better decision-making, enhanced transparency, and ultimately, improved performance for the firm and its investors.
7. Discussion
Other alternatives not selected include:
- Maintaining the status quo: This would mean continuing with the current approach, which is deemed insufficient for fully understanding performance drivers.
- Adopting a simplified performance attribution framework: This would be less comprehensive than the recommended approach and may not provide sufficient insights for effective decision-making.
Risks and Key Assumptions:
- Implementation challenges: Implementing a new performance attribution framework can be challenging and time-consuming. The Carlyle Group needs to ensure that it has the necessary resources and expertise to implement the changes effectively.
- Data quality: The accuracy of the performance attribution framework depends on the quality of the data collected. The firm needs to ensure that its data collection processes are robust and reliable.
- Employee buy-in: The success of the new framework depends on employee buy-in. The Carlyle Group needs to effectively communicate the benefits of the new approach and provide adequate training to its employees.
8. Next Steps
To implement the recommendations, The Carlyle Group should follow these steps:
- Phase 1 (Months 1-3): Form a task force to develop the performance attribution framework, including data collection and reporting processes.
- Phase 2 (Months 4-6): Pilot test the framework on a small subset of the portfolio.
- Phase 3 (Months 7-9): Roll out the framework across the entire portfolio.
- Phase 4 (Months 10-12): Conduct regular performance reviews and make adjustments to the framework as needed.
By taking these steps, The Carlyle Group can effectively implement a comprehensive performance attribution framework that will enhance its understanding of its commercial real estate portfolio and drive improved performance over the long term.
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Case Description
In April 2015, Shannon Enberg, Managing Director of Real Assets at the United Kingdom Telecom and Technology Pension Scheme (UKTTPS), received a startling memo from the fund's board of directors. In a nutshell, the board sought to reduce the fund's multimillion-pound annual expenditure on management fees by asking all managing directors to drastically cut the number of private managers being used to manage UKTTPS assets. Enberg was told to cut the number of her external managers in half, but given the illiquidity of her private equity investments in commercial property, she would be allowed to make the decision to rehire each manager (or not) as each of her investments matured. UKTTPS had two investments in closed-end property funds that had just liquidated their final holdings at the end of 2014. Both managers had new funds being raised that could recycle the investment proceeds, but now that she was being forced to cut back, Enberg wondered whether either was really worth rehiring.
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