If you’re wondering what private equity real estate is, what a private equity real estate firm does, and what makes private equity so appealing, then you’re reading the right blog.
Real estate private equity is a type of investment usually composed of debt and equity investments in the real estate markets. It allows multiple investors to pool funds and invest in the property market. These funds rose to prominence more than 20 years ago as a way to take advantage of commercial and residential real estate transactions. And they’re still going strong, especially in thriving real estate markets like Nashville.
In 2015, Market Realist, a company that provides expert online market research and analysis, wrote “Real estate private equity funds have been attracting unprecedented amounts of capital with assets under management (or AUM) reaching an all-time high of $724 billion. One of the key drivers of this growth is an increase in real estate valuations, which has led to a significant rise in the value of portfolios held by fund managers. Private equities (or PEs) primarily focus on superior risk-adjusted yields. The main objectives of private equities are the attraction of capital, sourcing, and qualifying investment opportunities, fund and investment structuring, and exit strategies.”
Although it’s a sound investment option, investing in real estate can be complex and time- consuming. Many investors are too busy managing careers or enjoying retirement to be tied down by the commitment. For individual investors, it may also tie up large amounts of capital.
When accredited investors partner with a private equity real estate firm, however, their assets are pooled with like-minded investors and expertly managed by highly qualified and experienced real estate investment professionals who look for the right opportunities, optimal time frames, risk-adjusted opportunities, and strong business plans. For many, this structure creates just the right level of engagement.
What Makes Private Equity Real Estate So Attractive?
Prequin, an international company that provides data and analysis to the alternative asset industry noted in its Q1 2017 Quarterly Update that “...private real estate continues to perform strongly for investors, with annualized returns of 14.9% for the three years to June 2016, the most recent data available. Private real estate funds have delivered 25 consecutive quarters of NAV growth to Q2 2016 and the PrEQIn Real Estate Index stands at 104.3 (rebased to December 2007), meaning that the fall in the Index from December 2007 to June 2010 has now been fully recovered.”
Unlike a real estate investment trust, private equity real estate isn’t tethered to the stock market. While a REIT can be an excellent investment option, if you’re looking to further diversify your portfolio, then you may want to consider adding private equity investments as well. Think of it as an “and” rather than an “or” investment strategy. Because private equity real estate investments are not tied to market fluctuations or what’s happening in the economy they add a new level of diversity to your holdings. Working with private equity real estate firm truly improves your portfolio’s risk-adjusted returns.
Socially, when you work with a company that’s committed to investing in your local economy, you know that you’re providing much-needed capital to builders and entrepreneurs to develop safe, well-constructed, and modern living and retail spaces for your fellow community members. This not only generates revenue and jobs, but it also fosters neighborhood redevelopment and pride.
When you work with a private equity firm with priorities that align with yours, you’ll likely enjoy healthy returns and the satisfaction of knowing that you’re building a stronger community. As Nashville continues to grow, building the right kind of homes, apartment complexes, and affordable housing is critical.
In order to achieve a greater balanced portfolio, one must consider that rising interest rates and volatile and unpredictable corporate profits, normally associated with stocks and bonds, could generate lower returns in coming years. Retail, commercial, and commercial residential properties, however, all have the potential to offer steady, healthy, long-term returns.
Why Invest with a Private Equity Firm?
Although investing in a private equity fund may tie up resources for several years, investors have the peace of mind of knowing that their capital is being invested in well-vetted properties with experienced developers and other real estate experts.
And while the immediate satisfaction and the thrill of the closing may sound appealing, directly investing in real estate carries risk and requires a significant level of expertise and time. When you invest with a private equity firm, you benefit from its team of experts and consultants. By pooling resources with others, capital can be used for many different investment projects and opportunities, thus reducing risk while delivering healthy returns. By using a private equity investment company, this balanced approach can be achieved by investors with minimum time and involvement.
Questions to Ask a Private Equity Fund Manager
What is Your Stake in the Fund?
If we’re talking about money, it’s only fair to ask a potential fund manager if they have a stake in the fund themselves. Look for a manager who has a significant commitment to his or her fund. This is an excellent indication of just how hard they’ll work to achieve excellent returns.
Be Clear About the Fees
Always ask about the fee structure. You’re investing a large sum of cash; you need to know how much is going towards real estate and how much is going toward management.
Who’s on Your Team?
Even if you’re working with a small equity firm, odds are good that they consult regularly with other trusted advisors. Learn about your team and their backgrounds.
Be on the Lookout for Conflicts of Interests
While it’s okay for the fund manager to have skin in the game, it’s not okay for the manager to run the title company, the construction company, and property management team!
Look at the Bigger Picture
Ask the manager how they came to be an investor, why they’re in real estate, what they’re passionate about, and what they’ve done. This will give you a good sense of their character and commitment.