WESTMOUNT INSIDER: Investing Passively in Direct Private Real Estate

Phil Copulsky, Senior Associate – Private Capital, shares four defining factors that differentiate investing in individual projects from that of commingled funds.

When many investors think about passively investing in commercial real estate, listed publicly traded REIT securities often come to mind. While one does get indirect exposure to real estate performance, REITs still represent public equity ownership in corporations, and therefore, can be subject to macro factors that broadly impact public markets. Some of the reasons investors choose to invest in real estate are to diversify their portfolios away from traditional asset classes (equities, fixed income, cash), reduce overall volatility, and target good risk-adjusted returns. Therefore, REITS as an alternative asset on its own may not provide sufficient asset allocation benefits.

Many investors across the spectrum, big and small, inclusive of individuals, RIAs, family offices, pension funds, etc. increasingly understand this. Therefore, investors increasingly seek more direct real estate exposure that is less correlated to public markets and therefore, can be less prone to the daily fluctuations of public markets, despite relative illiquidity versus REITs. Larger institutional investors often opt to allocate significant chunks of capital to fund managers who operate within a specific investment mandate. Investors such as pension funds and larger wealth managers often need to place more capital within their real estate sleeves and often prefer to conduct due diligence on a fund manager so they can rely on the discretion and expertise of that manager. These investors often do not have the capability or bandwidth to evaluate real estate opportunities individually.

Other investors, such as individuals, smaller wealth managers, and some family offices, enjoy the opportunity to invest directly with a sponsor regarding a specific investment opportunity. For these investors, they would prefer to understand both the sponsor and each deal that a sponsor raises equity for.

There are a few key differences and reasons why Westmount chooses to raise equity project by project versus raising through a fund structure. Here are some of the benefits we see:

 

1. Customized Exposure and Investment Discretion
Some investors like to evaluate, discuss, and ultimately pick and choose the specific opportunities they want to participate in. Investors have different preferences and risk tolerances. Picking individual deals allows investors to participate in deals they like while passing on those they are not in favor of. For example, an investor may not want to invest in a specific submarket. Participating in a fund structure would not allow the investor the discretion to opt out of a deal because of location or another factor that is not to his/her liking.

 

2. Less Focus on Capital Deployment
Because funds have committed capital that investors expect to be deployed within a certain period of time due to meet return expectations, fund managers can feel pressure to get capital invested. This can lead to more aggressive pursuit of deals that can in turn, lower returns expectations. There is not the same level of pressure with individual offerings because equity is raised only after the sponsor has a deal under contract.

 

3. More Flexibility During Hold Period
Funds often have a finite timeline to invest and realize their investments. This can lead to issues if fund managers need to realize their investments at inopportune times or during less-than-ideal market conditions, such as the 2008 GFC. Individual deal sponsors do not have similar pressure regarding investment horizon and have more flexibility to operate and work through a multitude of market cycles.

 

4. Accessibility
Funds often have higher minimums to participate. This is less often the case with individual deal sponsors. Minimums for individual deal sponsors can be as low as $25,000.

 

While there are certainly pros to raising equity project by project, there are also benefits to operating within a fund structure such as having committed capital once investment opportunities are identified and raising capital during a specific time interval. For funds, capital is raised all at once, which means investors are conducting diligence on just the fund managers and not the individual deals. Once a fund decides to move forward with a specific opportunity, capital is ready to be deployed and does not have to be raised in a more operational intensive fundraising process individual deals often require. For investors less familiar with commercial real estate investing, some prefer the chance to rely on professional fund managers to identify and make investment decisions on their behalf. Finally, a single fund with a variety of holdings can offer more diversification and liquidity opportunities than individual deals are often able to provide.

 


 

Author: Phil Copulsky, CFA

Phil is a Senior Associate in the Private Capital department at Westmount Realty Capital, LLC, responsible for raising equity capital. He earned his BA at Hobart College and an MBA with a real estate finance concentration at the University of Texas at Austin. He has worked for companies including Goldman Sachs, Invesco Real Estate, and Pennybacker Capital.

To learn more about Westmount Realty Capital or for additional information, contact us at info@westmountrc.com or find us at https://westmountrc.com/.

To contact the author, email PCopulsky@westmountrc.com

 

This article, and Westmount Realty Capital blogs in general, is intended for informational and educational purposes only, and does not constitute a solicitation or offer by Westmount Realty Capital, LLC to buy or sell any securities, futures, options, foreign exchange or other financial instrument or to provide any investment advice or service. Westmount is not your advisor or agent. Please consult your own experts for advice in these areas. Although Westmount provides information it believes to be accurate, Westmount makes no representations or warranties about the accuracy or completeness of the information contained on this article.

 



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