The LP's Dilemma: Evaluating Manager Strength in a Market Rewarding Operators Over Allocators
© 2026 Realty Capital Analytics LLC
SUMMARY & KEY TAKEAWAYS
• GP’s with operational capabilities now represent 37% of real estate AUM, up 11 points over the past decade.
• After two years of negative returns, 2025 showed recovery but operational alpha remains essential.
• Persistent negative leverage spreads demand value creation through NOI growth, not market beta.
• Track record disaggregation reveals true operational capability versus market timing.
The real estate private equity landscape has undergone a fundamental shift. According to McKinsey's 2025 Global Private Markets Report, general partners with demonstrated operational capabilities now account for 37% of real estate assets under management, an increase of approximately 11 percentage points over the past decade. This migration of market share from pure financial engineers to operationally-oriented managers reflects a broader recognition that returns depend increasingly on asset-level value creation rather than financial leverage and market timing.
For limited partners evaluating manager selection, this shift presents both opportunity and challenge. The opportunity lies in identifying managers whose operational capabilities can generate alpha independent of market conditions. The challenge lies in distinguishing genuine operational expertise from marketing claims, and in developing evaluation frameworks appropriate to a discipline that resists easy quantification.
Why Operational Strength Matters Now
The 2010’s rewarded a particular type of real estate investor: those with access to capital, relationships with sellers, and willingness to deploy at scale. In an environment of declining interest rates and compressing cap rates, the primary determinant of returns was often simply being invested. A manager who acquired assets at market prices with market leverage could generate attractive returns as values appreciated broadly.
That environment has fundamentally changed. After closed-end real estate funds posted negative pooled IRR through 2024 (the second consecutive year of decline for open-end funds since the Global Financial Crisis), the industry entered 2025 showing early signs of stabilization; however, returns remained bifurcated: managers with operational capabilities captured the lion's share of positive performance, while capital allocators without value-add programs continued to struggle. As we enter 2026, the lesson is clear: in an environment where market beta has compressed, manager selection and specifically the ability to identify managers capable of generating operational alpha has become the primary determinant of LP outcomes.
The mathematics remain challenging. When acquisition cap rates hover around 5.5% and financing costs exceed 7%, assets generate negative leverage from day one. Returns in this environment must be manufactured through operational improvement (driving revenue, reducing expenses, and repositioning assets to command premium valuations) rather than harvested through market appreciation. While rate cuts in late 2024 and 2025 provided some relief, spreads remain compressed compared to historical norms, and operational capability remains essential to generating acceptable risk-adjusted returns.
Defining Operational Capability Beyond Marketing Claims
Virtually every real estate private equity manager now claims operational expertise. The term has become so ubiquitous in marketing materials as to lose specific meaning. For LP’s conducting due diligence, the challenge is distinguishing managers with genuine operational capabilities from those employing the terminology without the substance.
Genuine operational strength manifests across several dimensions. First, it requires organizational infrastructure: dedicated asset management professionals with authority and accountability for property-level performance, reporting systems that surface operational metrics in real-time, and compensation structures that align asset management incentives with LP outcomes. A manager claiming operational focus while maintaining a skeleton asset management team subordinate to acquisitions professionals is revealing a gap between rhetoric and reality.
Second, operational capability requires specific knowledge applicable to the manager's investment strategy. A multifamily operator should demonstrate expertise in revenue management systems, leasing optimization, expense benchmarking against comparable properties, and capital expenditure prioritization. An industrial manager should understand tenant credit evaluation, lease restructuring, and the operational requirements of modern logistics users. Generic claims of operational excellence without strategy-specific expertise warrant skepticism.
Third, and perhaps most importantly, true operational strength should be evident in track record attribution. Managers with genuine operational expertise should be able to disaggregate historical returns into components: how much came from market appreciation, how much from leverage, and how much from operational improvement at the asset level. Those unable to provide this attribution may lack either the operational impact or the analytical rigor to measure it.
An Evaluation Framework for LPs
Limited partners seeking to evaluate manager operational capability should structure due diligence around several key dimensions.
Organizational Analysis. Request organizational charts that illustrate the relationship between investment, asset management, and property management functions. Evaluate the seniority and compensation of asset management professionals relative to acquisitions staff. Interview asset management leadership directly, not merely investment professionals who may present a curated narrative. The depth and quality of the asset management organization reveals the manager's genuine operational commitment.
Track Record Disaggregation. Require managers to decompose historical returns into contributing factors. What portion of realized IRR derived from cap rate compression versus NOI growth? Within NOI growth, how much came from market rent increases versus above-market leasing performance or expense reduction? Managers with genuine operational impact should welcome this analysis; those who resist may be concealing returns driven primarily by market factors unlikely to repeat.
Case Study Deep Dives. Select specific assets from prior funds and conduct detailed operational reviews. Request historical operating statements, capital expenditure records, and leasing summaries. Evaluate how the manager identified value creation opportunities at acquisition, what specific initiatives were implemented, and how actual results compared to the original business plan. This granular analysis reveals whether operational claims are supported by property-level evidence.
Technology and Systems Assessment. Modern operational excellence increasingly depends on technology infrastructure. Evaluate the manager's investment in property management systems, business intelligence platforms, and data analytics capabilities. Managers operating with legacy systems and manual processes face structural disadvantages relative to those leveraging technology to optimize operations at scale.
Third-Party Property Management Relationships. Many operationally-focused managers utilize third-party property managers rather than maintaining in-house management capabilities. This is not inherently problematic, but requires evaluation of how the manager oversees and directs these relationships. What reporting do they require? How frequently do they conduct property inspections? What mechanisms exist to hold third-party managers accountable for performance? The sophistication of third-party oversight often reveals more about operational capability than whether management is conducted in-house.
Red Flags and Warning Signs
Certain patterns in due diligence should raise concerns about the authenticity of operational claims.
Managers who emphasize acquisitions expertise while providing limited detail on asset management processes may be capital allocators marketing themselves as operators. Similarly, track records that show consistent outperformance during bull markets but limited differentiation in challenging periods may reflect market timing rather than operational skill.
High turnover in asset management positions can indicate organizational dysfunction or inadequate investment in the function. Request tenure data for asset management professionals and evaluate whether the firm has built institutional knowledge or relies on transient staffing.
Compensation structures that reward deal volume over asset-level performance reveal misaligned incentives. If investment professionals are compensated on acquisition and disposition activity while asset management compensation is modest and disconnected from property-level outcomes, the organizational incentives do not support operational focus regardless of marketing claims.
Finally, managers who cannot articulate specific, measurable operational initiatives planned for current holdings may lack genuine operational programs. Claims of operational expertise should translate into concrete business plans with identified initiatives, projected impact, and accountability for execution.
Portfolio Construction Implications
The shift toward operational value creation has implications for LP portfolio construction beyond individual manager selection. In an environment where operational capability drives returns, LP’s should consider several strategic adjustments.
Concentrate commitments with fewer managers who demonstrate genuine operational expertise rather than diversifying across many managers with undifferentiated capabilities. The marginal diversification benefit of the sixth or seventh manager relationship may be outweighed by the dilution of exposure to top-tier operators.
Increase allocation to co-investment opportunities with operationally-oriented managers, which provide direct exposure to specific operational value creation programs while reducing fee drag. Co-investments also create opportunities for deeper operational due diligence at the asset level.
Evaluate manager compensation structures with operational capability in mind. Fee arrangements that reward AUM growth may misalign incentives for managers whose alpha derives from operational improvement rather than capital accumulation. Performance-based compensation tied to operational metrics, not merely IRR, may better align manager and LP interests.
Implications for the Decade Ahead
The migration of market share from capital allocators to operationally-oriented managers represents a structural shift, not a cyclical phenomenon. While interest rates may eventually moderate and some market tailwind may return, the competitive advantage of operational capability is unlikely to diminish. Managers who have invested in building operational infrastructure will retain that advantage even if market conditions become more favorable.
For limited partners, adapting to this reality requires evolution in due diligence practices. Traditional evaluation frameworks emphasizing track record, team tenure, and investment process remain necessary but are no longer sufficient. LP’s must develop capabilities, either internally or through advisory relationships, to evaluate operational claims with the same rigor applied to investment strategy assessment.
The managers who will generate superior returns in the current environment are those who can manufacture alpha through operational improvement when market appreciation is no longer available to harvest. Identifying these managers, and distinguishing them from those who merely claim operational expertise, has become the central challenge of real estate private equity allocation.
How Realty Capital Analytics Can Help
Realty Capital Analytics provides independent, analytically rigorous manager evaluation services to limited partners, family offices, and capital allocators. Our team combines deep operational real estate expertise with institutional due diligence standards to help investors distinguish genuine operational capability from marketing rhetoric.
Manager Operational Assessment. We conduct comprehensive evaluations of GP operational capabilities, including organizational analysis, track record disaggregation, and asset-level case study reviews.
Track Record Attribution Analysis. Our proprietary methodology decomposes historical returns into market beta, leverage effects, and operational alpha to reveal the true sources of manager performance.
Due Diligence Support. We provide institutional-quality due diligence memoranda, reference call frameworks, and investment committee presentation support for LP allocation decisions.
Portfolio Strategy Advisory. We advise LP’s on portfolio construction, manager concentration, and co-investment strategy in the context of the evolving operational landscape.
This content is provided for informational purposes only and does not constitute investment advice. Past performance is not indicative of future results. Investors should conduct their own due diligence and consult with qualified advisors before making investment decisions.
About Realty Capital Analytics
Realty Capital Analytics LLC is a real estate analytics and consulting firm providing institutional-grade financial modeling, market intelligence, and advisory services to private equity funds, developers, and capital allocators. Founded on the principle that superior analysis drives superior returns, RCA combines deep real estate finance expertise with rigorous quantitative methodologies to help clients navigate complex investment decisions.