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Private equity real estate allows high-net-worth individuals or HWNIs to invest in equity and debt holdings related to real estate assets. In this article, we will be discussing the contemporary structure of private equity real estate funds and how it works.
This article covers the different types of private equity real estate funds and how investors can make money from them.
Private equity real estate investing involves acquiring, financing, and owning a property (or properties) using an investment fund. Private equity real estate is an alternative asset class that is made up of private and public investments in the real estate markets.
This is different from REITs or real estate investment trusts that are traded publicly. REITs mainly generate revenue through the rent paid by tenants.
Private equity real estate takes a diversified approach to property ownership. It uses an active management strategy wherein general partners (GPs) and limited partners (LPs) work together to invest in real estate. GPs typically invest in different property types in varying locations. This may include new properties and raw land holdings as well as existing properties that need to be redeveloped. [1]
Private equity real estate investments are usually pooled. They can be structured as the following: limited liability companies (LLCs), limited partnerships (LPs), private REITs, collective investment trusts, separate insurer accounts, C-corps, S-corps, or other legal structures.
What is a Private Equity Fund and How Does it Work?
A real estate private equity, at its simplest, is a partnership that is created to raise equity for a real estate investment. A GP, also known as a sponsor, creates the fund and looks for LPs or investors who would invest equity in the partnership. These funds will be invested in real estate development along with any money that was borrowed from banks or other lenders. The funds can also be used in other acquisition opportunities. [2]
The sponsors provide most of the equity capital. These LPs are passive investors who want to participate in the deal created by the GP. The sponsor is in charge of finding investment opportunities and managing the real estate property once it has been acquired. They also take charge of the private equity fund itself. Sponsors typically earn fees based on its performance.
There are many different types of private equity real estate investments: office buildings, industrial properties, retail properties, shopping centers, and multifamily apartments are among the most common investments for private equity real estate. It may also include more niche property investments like student or senior housing, self-storage, medical offices, hotels, single-family housing, manufacturing space, and undeveloped land. [1]
Sponsors need to be clear about the potential risk/rewards of the fund and try to stick with that goal. There are five types of risk-adjusted funds within the private equity industry: core, core-plus, value-add, opportunity, and distressed debt.
Core is a type of fund that has the lowest risk/rewards. These are well-occupied and stable assets in primary markets and locations. Core-plus is a type of fund that contains high-quality assets but within secondary markets or locations. They are slightly risky assets.
Value-add is a type of fund that contains assets that are improved through redevelopment or re-leasing. They also include new development. Opportunity is a type of private equity fund that involves redeveloping and repositioning poorly operated, outdated, or vacant buildings. They have generally higher risks/returns. [2]>
Distressed debt or mezzanine is a type of fund that purchases senior loans, mezzanine loans, or non-rated commercial mortgage-backed securities (CMBS) tranches.
When it comes to private equity real estate, there are many potential routes sponsors may take, but they need to clearly articulate their fund’s strategy to investors. LPs seek returns by tying up their funds for several years with barely any control over how the fund operates. By properly explaining their fund’s strategy, sponsors can easily secure capital from LPs. In fact, a lot of sponsors are only able to create a fund after demonstrating success and a healthy portfolio. [2]
How Do Private Equity Real Estate Companies Make Money?
Private equity real estate lacks liquidity and flexibility, which means sponsors need to know exactly what they are doing in order to make it profitable for everyone involved. That said, this investment type can provide high levels of income with strong price appreciation if done right. Securing annual returns ranging from 6% to 8% with a core strategy and 8% to 10% for a core-plus strategy is not uncommon. [1]
Investors earn an early return on its capital and a preferred return on its capital. Although the returns for opportunistic and value-added strategies may be higher, there is a significant risk involved.
The private equity industry is actually unique because it offers a wide range of revenue streams, such as through carried interest, management fees, or dividend recapitalizations. [3]
Private equity firms can make a lot of money for investors, especially if the fund is handled well and a good strategy is followed.
How Long Does a Private Equity Fund Last?
A private equity fund is a collective investment scheme used for making investments in various equities and debt instruments. These funds can have a tenure or investment horizon of between 5 to 10 years. It also comes with the option of an annual extension. [4]
Private equity funds are usually not available to everyone. The capital is raised by HNWI’s and investment banks who can afford to invest large sums of money for longer periods of time.
Why Work With BAM Capital for Multifamily Syndication Deals
Multifamily syndication is a type of real estate investment wherein multiple investors pool their resources together to purchase an asset. Just like private equity real estate, there is a sponsor who locates the deal and then finds investors who will participate. This sponsor serves as the general partner who coordinates the transaction throughout the process. [5]
Any type of real estate can be used for a syndication deal, but multifamily syndication is the most popular because it is a low-risk investment. Multifamily properties are also typically more expensive, which is why individual investors cannot buy them on their own.
In exchange for equity in the multifamily property, passive investors provide most of the capital required. Syndication is also known as crowdfunding for real estate.
If you are interested in multifamily syndication, BAM Capital works with accredited investors and negotiates the purchasing and financing of high quality multifamily real estate properties on their behalf.
This Indianapolis-based company currently has over $700M AUM and 5,000+ units. BAM Capital has a strong Midwest focus, prioritizing Class A, A-, and B++ multifamily properties because they offer the lowest risk for BAM’s investors.
As an investor looking into Class A real estate investing, there is no need to purchase an asset on your own. BAM Capital will arrange the syndication deal and also handle property management.
Our investors love the low-risk investment approach offered by BAM Capital. Investors can pool their resources and get money from the cash flow and equity once the deal is done. Investors can enjoy BAM Capital’s low-risk investment strategy that creates forced appreciation. BAM’s vertical integration model also mitigates investor risk. [6]
Schedule a call with BAM Capital and invest today.
Sources:
[1]: https://www.investopedia.com/terms/p/private-equity-real-estate.asp
[2]: https://www.naiop.org/Research-and-Publications/Magazine/2018/Spring-2018/Finance/How-to-Set-Up-a-Private-Equity-Real-Estate-Fund
[3]: https://www.ictsd.org/how-do-private-equity-real-estate-companies-make-money/#2
[5]: https://www.millionacres.com/real-estate-basics/real-estate-terms/investing-multifamily-syndication/
