Principal‐agent Issues in Asset Acquisition: UK Institutions and their Investment Agents

Summary

This paper explores principal‐agent issues in the stock selection processes of institutional property investors. Drawing upon an interview survey of fund managers and acquisition professionals, it focuses on the relationships between principals and external agents as they engage in property transactions. The research investigated the extent to which the presence of outcome‐based remuneration structures could lead to biased advice, overbidding and/or poor asset selection. It is concluded that institutional property buyers are aware of incentives for opportunistic behaviour by external agents, often have sufficient expertise to robustly evaluate agents’ advice and that these incentives are counter‐balanced by a number of important controls on potential opportunistic behaviour. There are strong counter‐incentives in the need for the agents to establish personal relationships and trust between themselves and institutional buyers, to generate repeat and related business and to preserve or generate a good reputation in the market.

Keywords:

• Stock selection
• principal‐agent
• incentives

Notes

¹ These are the institutional arrangements; they are not, of themselves, investigated in this study. Agents are generally free to introduce to whoever they consider to be the most likely buyer. In some cases, investors retain agents who have exclusive rights to introduce investment opportunities to them.

² This is substantial revenue stream for commercial real estate investment agents. At end of 2007, IPD estimated the value of the UK commercial property investible universe at [euro]411.2 billion. Assuming (probably conservatively) total fees of 1.25% of capital value (1% is standard for acquisition but is negotiable for large lot sizes), and that 10% of properties are transacted, this would suggest that transaction fees generated by total institutional grade space could have been over [euro]500 million in total for the UK. This, of course, excludes agency fees for non‐UK acquisitions.

³ These were held after our initial analysis of the results in order to test some of the conclusions being drawn.

⁴ This ongoing process of comparing what is being said, to prior conceptual assumptions, helps in resolving which theoretical ideas are most appropriate or important in understanding what is happening. Stated more formally, the process of comparing existing theory to the data, the modification of theory, and the re‐examination of the data against that modified theory, are heuristic, developmental activities. The aim is to identify which theory (or set of explanations) best accounts for what actually happens (Glaser, 1992). To facilitate interpretation, computer software was used to link the concepts to what people had said. The software used was NVivo (version 2.0). The software does nothing that could not be done manually, though it makes more efficient activities such as the organization, retrieval, and comparison of transcribed passages. The coded transcripts were augmented, however, by the researcher’s own notes taken at or in relation to each interview.

⁵ In the results section, we have labelled individual interviewees according to the roles within their organization. The following abbreviations are used to attribute the quotes to general categories: Fund manager, FM; Acquisition specialist, AS; Acquisition and asset manager, AAM; Acquisitions and fund management, AFM; All preceding functions, ALL.