FNRP Spotlight Series: Operating a Successful Private Equity Firm

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Key Takeaways

  • Vertical integration sets FNRP apart from other operators in the industry through optimization of operational efficiency and expense management in the acquisition and management of real estate assets.
  • The cornerstone of FNRP’s operations is a platform known as FNRP360, which is an in-house management and operating platform that brings together leaders from every functional area of the firm.
  • Data mapping, data warehousing, and budgeting tools allow FNRP employees to be more productive and provide access to key information that is used in decision making.
  • FNRP employees are empowered to take full ownership over a set of responsibilities and execute them in a way that encourages creativity and a continuous improvement cycle.

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Periodically, FNRP shares the experience and insights of key members of the executive team to give our partners an inside look at the people and work that drive our success as a private equity commercial real estate firm. We value the trust and ongoing support of our partners, and through the FNRP Spotlight Series, we strive to create a two-way street where our leaders can share ideas, thoughts on the investing landscape, and provide a glimpse into the projects that are top of mind.

FNRP’s Operations Department is led by Chief Operating Officer, Kurt Padavano. Kurt oversees a team of professionals who manage the firm’s day-to-day operations as well as the asset and property management functions. Under Kurt’s leadership, FNRP has grown to serve more than 2,600 investors with over $2 billion in assets under management. The FNRP portfolio under Kurt’s supervision consists of over 60 commercial real estate assets nationwide totaling over 12 million square feet of gross leasable area.

The following is an overview of some of the key characteristics that define FNRP operations and is based on a recent conversation with Kurt. As a highly respected manager within commercial real estate circles, he provided thoughts and insights into FNRP’s operating framework and the ways in which it has been intentionally constructed for the benefit of our investors.

Vertical Integration Sets FNRP Apart

The modern private equity commercial real estate industry comprises a wide range of firms, each seeking to gain an edge they can tout to investors. It is common to see firms rely on a business model centered around a few key individuals focused on capital allocation, while the remaining functions are outsourced to third parties. The most common argument in favor of this approach centers around efficiency and cost control. The idea is that third parties can complete a recurring task more efficiently because they are well-versed in it, while also lessening the cost burden on the private equity firm.

The modern private equity commercial real estate industry comprises a wide range of firms, each seeking to gain an edge they can tout to investors. It is common to see firms rely on a business model centered around a few key individuals focused on capital allocation, while the remaining functions are outsourced to third parties. The most common argument in favor of this approach centers around efficiency and cost control. The idea is that third parties can complete a recurring task more efficiently because they are well-versed in it, while also lessening the cost burden on the private equity firm.

At FNRP, we take an opposing view that vertical integration – the practice of procuring all necessary operations personnel in-house – sets our firm apart from others in the industry and allows us to acquire and manage assets more effectively and without a cost penalty.

Kurt demonstrated how vertical integration is core the FNRP operating model when he said, “It is our strong preference to manage and control the assets we invest in because this positions us to retain control over the execution of the business plan.”

FNRP360 Enhances Information Flow and Decision Making

The cornerstone of our firm’s operations is FNRP360, an in-house management and operating platform that brings together leaders from every functional area of the firm to ensure that our teams remain nimble, that every employee is aligned on key opportunities and challenges, and that conflicts of interest inherent in many third-party relationships are mitigated.

Applying a vertically integrated operating model that is designed to foster communication across our teams allows for decisions to be made and business plans to be executed at an industry-leading pace. In comparison, many of our competitors hire third parties to carry out business plans but find that these vendors lack familiarity with the firm’s capabilities and tend to require ongoing input from management, which can increase the time needed to execute the business plan.

The Cost Myth Associated with Vertical Integration

On the cost side, Kurt and the FNRP leadership team are constantly monitoring the firm’s cost structure, and, after years of analysis, have concluded that outsourcing operations simply does not result in meaningful cost savings. In fact, due to delays, lost communications, and the need to coordinate among vendors, an outsourced model can often result in a higher cost structure and added complexity.

An Intense Focus on Operational Execution for the Benefit of Investors

In today’s commercial real estate market, operational execution is as important as it has been in a generation. On this topic, Kurt emphasizes the benefits of maintaining an in-house asset management team. Specifically, we can invest in tenant relationships and gain an understanding of the features that tenants value in a retail center, the tenant’s intentions to remain in place or relocate, and the tenant’s financial situation. Getting to know each tenant and catering the operations of the center to tenant needs helps to drive retention and increased rent revenue over time.

Many private equity firms rely on third parties to perform key acquisition activities. A common issue with this approach is that third-party brokers and other vendors are interested in seeing a sale close because this triggers compensation. It is a harsh reality within the industry that many third parties do not go the extra mile to ensure that the acquiring firm is positioned for success after the transaction closes.

In contrast, our leadership team understands that acquiring a successful asset requires input from several asset management functions, including property management, accounting, and leasing. According to Kurt, “A vertically integrated operating model brings key functions in house, where employees from each area work together before and after closing to maximize the value of the asset and the returns to investors.”

Harnessing Technology to Improve Decision Making

Many firms rely solely on technology to provide answers to business decisions, pricing, and acquisition targets, but our leadership team takes a more nuanced approach.

When asked about the role of technology in FNRP’s operations, Kurt described it as one of several tools in the firm’s toolbox. Every employee derives value from the systems that have been carefully selected to drive internal operating efficiencies. Specifically, data mapping, data warehousing, and budgeting tools allow our employees to be more productive and provide access to key information that is used in decision making on a daily basis. Kurt put it best when he said, “More data managed correctly makes for better decisions.”

Technology to Allow for Firmwide Information Flow

At FNRP, we have developed a capability unique in the industry that allows employees to aggregate data from different platforms into a single source and use it to gain a deep understanding of key facets of the business, including tenant profiles and financial health, debt terms and covenants, and tenant exclusives. Providing our team of professional asset managers with access to a best-in-class data source increases the opportunities across our firm to maintain excellent tenant relations, control expenses, and maximize the value of vendor relationships.

Culture Unleashes the Full Potential of Our People

It is no secret that competition for talent is fierce in the private equity industry, and retaining top talent is a struggle for many firms. Unfortunately, many private equity firms view employees as simple inputs to an acquisition machine, rather than as valuable assets who have a direct influence on the firm’s overall success.

Unrivaled Employee Empowerment

Kurt points out that FNRP takes a different approach to people that places an emphasis on culture, core values, and entrepreneurialism. We make a point of offering each employee a unique opportunity to bring their full skillset to work every day. Each employee is empowered to take full ownership over a set of responsibilities and execute them in a way that encourages creativity and a continuous improvement cycle. Tasks are delegated throughout the organization in a way that places trust and reliance on each employee to execute business plans with an eye toward maximizing the firm’s value proposition for the benefit of investors.

Guardrails Drive Firmwide Accountability

At the same time, we maintain a series of processes and systems that define roles and responsibilities across the firm. This framework was purposefully created to ensure that issues can be addressed quickly and effectively without the risk of corporate red tape slowing progress. This intersection of entrepreneurial culture and process-driven workflows achieves a balance that allows each employee to bring a unique perspective while ensuring that workflows are executed efficiently and with a high degree of accountability.

Standing Out Through a Unique Hiring and Employee Feedback System

Sourcing and hiring talent are additional areas where our operating model is differentiated from peer firms. Many firms value experience and technical skills, but at FNRP, core values, in addition to technical competency, are at the heart of the hiring process. Candidates progress through a rigorous interview process to gauge whether the individual is a cultural fit. Job candidates are also required to present a case study to a group of FNRP employees aimed at demonstrating the individual’s ability to solve problems relevant to the responsibilities of the position.

Kurt notes that most firms subject their employees to an annual performance review where managers attempt to recollect an employee’s technical performance throughout the year. This often leads to incomplete or even inaccurate feedback, and it usually results in little change to employee behavior because it requires employees to implement changes based on performance that took place weeks or even months ago.

In contrast, our managers provide continuous, real-time feedback to employees shortly after completing an assignment. Importantly, all our managers offer feedback that is based on the firm’s core values and each employee’s cultural fit within the organization in addition to technical performance. This unique performance feedback system offers employees actionable feedback and guidance that can be implemented immediately to improve employee and firm performance.

Positioning the Firm for Success Across Geographic Regions

We own necessity-based commercial real estate across the country, including grocery-anchored retail centers, neighborhood retail centers, workforce housing, and light industrial assets. Our employees are also spread across the country, and this benefits our firm in several ways.

First, while most firms operate from hubs located on the east or west coasts, we have built a national employee footprint. As Kurt points out, “A national footprint allows our firm to have a representative on site in almost any market within a short period of time.” This means that an FNRP representative can be available, even on short notice, for an in-person tenant meeting, to oversee construction work, or to partake in a due diligence review. In a world where virtual meetings have become commonplace, we are able to go the extra mile to accommodate our stakeholders.

Finally, Kurt spoke about the fact that FNRP owns clusters of assets in certain geographic markets, and there are some distinct benefits that result from this. First, concentration in certain markets allows for scale efficiencies, especially among the construction firms and materials suppliers that tend to offer volume discounts. Additionally, brokers in these markets know the FNRP acquisitions team very well and have a strong understanding of our firm’s typical deal profile as well as the types of properties and performance history that our team looks for before proceeding with an acquisition.

Conclusion

The private equity commercial real estate industry is highly competitive, but many firms fail to realize the competitive advantages inherent in a vertically-integrated operating model. We have succeeded in building out teams to service every key function needed to acquire and manage high-performing grocery-anchored retail centers. This operating model has served our investors well for many years and positions the firm for success across market cycles.

Additionally, we are unique in an industry known for emphasizing financial performance at the expense of culture and employee growth. By emphasizing a set of core values, every employee can fulfil their potential, contribute to the entrepreneurial nature of the firm, and drive strong returns for investors.

We are proud to put forward the thoughts, viewpoints, and forward-looking statements shared by our leadership team, but this should not be taken as investment advice and prospective investors are cautioned against placing undue reliance on these thoughts, viewpoints and statements. If you would like to learn more about First National Realty Partners and our current investment offerings, visit our website or connect with us on social media.

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