Lifting the lid on AUM
Recently, the collaborative forces of INREV, ANREV and the NCREIF/PREA Reporting Standards completed a deep dive into assets under management (AUM). The exercise revealed some intriguing insights and IQ has delved into the latest chapter in the ever-evolving story of one of real estate’s key financial metrics.
AUM is such a ubiquitous term that, on the face of it, there should be little doubt as to what it means and how it is expressed. Yet its ubiquity belies a wide variety of perspectives. Perhaps the most significant finding from the research is that, landing on a single definition of AUM is both very difficult and, maybe surprisingly, not necessarily desirable in the first place.
Dedicated focus
Led by the Global Standards Steering Committee, the four partners began their examination of AUM a year ago. Part of the aim was to identify some of the key similarities and differences in the methodologies adopted by investment managers and investors in calculating AUM.
Perhaps the most significant finding from the research is that, landing on a single definition of AUM is both very difficult and, maybe surprisingly, not necessarily desirable in the first place
By all accounts, the conclusions the group have already published are only the starting point. In part, this dedicated focus is a great illustration of the enduring partnership approach consistently embodied by INREV, ANREV, NCREIF /PREA Reporting Standards in their joint endeavours to meet the needs of their respective memberships by sharing knowledge and best practices.
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‘What’s very apparent is that this exercise has offered up some extremely useful insights,’ says, Matthias Pilz, Allianz Real Estate. ‘As an investor, I can see real advantage in a deeper understanding of AUM calculation methods because it will help provide an additional layer of precision in our thinking around investment strategy, capital allocation and manager selection.’
Parallel lines
To some extent, the AUM exercise is analogous to the Net Asset Value (NAV) comparison project conducted by INREV, ANREV and NCREIF PREA Reporting Standards in 2019. In that case, the identified differences in NAV calculation principles occurred along geographic and regional lines, with market participants in Europe taking a different stance to those in the US. For AUM, the differences tend more toward the purpose of reporting and the organisation calculating AUM.
For AUM, the differences tend more toward the purpose of reporting and the organisation calculating AUM
How an investment manager with a focus on private equity views AUM can be quite different from the approach taken by a pure play real estate investment manager. Likewise, where real estate investment managers look upon AUM from the perspective of debt and equity; their counterparts on the investment side see assets as gross or net of leverage.
However, one of the key conclusions from the AUM paper is that different approaches may be less important in themselves than the willingness of all participants to be open and transparent about where the areas of separation lie.
According to Andrew Muscat, LaSalle Investment Management, the key is greater transparency in disclosure: ‘There is a clear benefit for the whole industry to increase disclosure around AUM to allow investors and other readers to understand the how reported AUM is calculated. As an investment manager, we would like to learn more about the different uses of AUM and the different approaches adopted by our peers. This additional detail will help paint a more comprehensive picture of AUM and increase the value of reported numbers’
There is a clear benefit for the whole industry to increase disclosure around AUM to allow investors and other readers to understand the how reported AUM is calculated
No right nor wrong
One of the key outtakes from the research is that, at present, there is no single calculation methodology that meets the myriad reporting requirements of different market participants – whether they are for regulatory or investment purposes. By the same token, there are no wrong answers either.
However, one area where market participants could really enrich industry understanding by adopting more common principles, is in relation to research. Already, considerable progress has been made on this front. For example, all respondents to the most recent edition of the Fund Manager Survey, published in April, applied the same research definition and calculation methodology for AUM to their data submissions, allowing for much clearer comparison of results.
Unfinished business
Constantin Sorlescu, INREV’s Director of Professional Standards, says that one of the most important outcomes of the work INREV, ANREV, NCREIF/PREA Reporting Standards have undertaken has been to refocus attention on AUM in a constructive way. ‘We’ve lifted the lid on the subject and introduced a structured conversation that’s enabled us to pick through what, in the past, has often been a thorny debate. We’ve uncovered some useful observations and created a thinking framework. On the back of this, we’ve added value through the creation of a practical excel based tool to help market participants disclose their respective AUM components in a clean and simple way.’
Now, it seems, the industry is poised for the next phase of discovery. According to Sorlescu, the in-depth work that’s been carried out to date has encouraged an appetite to go further. All partners are ambitious about what else could be achieved.
Now, it seems, the industry is poised for the next phase of discovery
There is excitement about the very realistic potential of being able to reduce the number of calculation methods, over the next few months. And, over the longer term, there’s also a goal to introduce a framework which will help deliver greater convergence of approaches to AUM.
There’s some way still to go, but such initiatives would clearly be worthwhile. For an industry that’s constantly seeking additional ways to reach the greatest levels of consistency and transparency possible, the prize seems obvious.