Private equity is an investment option where individuals invest in private companies or participate in public property buyouts. These buyouts result in the delisting of public equity from the company. In primate equity, the investors provide capital to the private companies to help bolster business, update technology, and help balance the accounts sheets.
One form of private equity is the real estate fund. The sponsor usually creates a fund and asks limited partners to invest in the fund. The limited partners are often individual investors, banks, or hard money lenders like 14th Street Capital. They hold most of the shares while the general partner manages the investment to develop real estate or acquire new properties.
Investing In Private Equity Real Estate
The real estate market has shown promising potential to grow and boost investment returns. This has tempted many investors and financial institutions to consider putting their money on these funds. With the availability of private equity funds, the potential for high rates of return has further increased the urge to join these fund pools.
However, there are several things that you need to understand before investing. Here’s a helpful guide on how to go about it:
Find A Suitable Fund
Private equity investment funds are usually targeted at high-net-income earners as the target is usually around USD$20 million dollars. Most firms usually look for reputable investors for a long-term partnership, making it hard for individual investors to shop around for platforms.
The nature of the investment limits outside investors to a limited partnership. This means that the outside investors will have no control over the properties that the fund managers choose to invest in. Because of this, individual investors should look for firms with real estate specialty if their priority is in real estate private equity.
Understand Additional Cost Structures
Investors should know the extra costs that’ll be incurred during the investment period. The fund managers should clearly state these costs, and the cost is deducted from the returns. The costs include performance fees, legal fees, and research costs.
Investors could also be required to raise funds on a needs basis. General partners usually ask limited partners to raise capital that they had been promised at the beginning of the cycle as they seek to expand investments. This capital call is usually an obligation, and limited partners must raise the money or risk losing their funds and being removed from the fund.
Such cost structures and additional costs need to be understood before committing to any private equity real estate investment. Losing your money because you didn’t understand the cost structure of a fund could be devastating.
Keep In Mind The Risks And Potentials
Like other investments, private equity funds have risks that investors may have to manage during the investment period. General managers don’t offer investors a chance to withdraw their investment before the investment period is over. This tied-up structure limits the control of funds by investors for up to a decade.
Another risk associated with real estate equity funds is the capital call obligations. The investors must pay the required capital even if they’re low on funds or risk losing their shares. Fund managers also aren’t regulated to share any information with limited managers. Limited investors, therefore, lack updates on the portfolio value or any new developments in investment.
However, on the upside, real estate private equity has the potential of high returns after the investment period. Investors also don’t have to worry about what’s going on in the real estate industry. Fund managers take care of all these things and later on give the investors their capital and interests.
Learn About The Types Of Equities
Any investor looking to venture into real estate private equity should look into the different types of equities to invest in. The types include the following:
- Core: Risk-averse investors mainly consider this. Core funds focus on high-value real estate to reduce the risk of investment. The returns, however, are low.
- Value Added: In value-added, managers purchase properties, redevelop them, then sell the properties when the market is good. It has the potential for higher returns and higher risks too.
- Core Plus: Managers combine the value of Core and Value Added equities. It offers a higher return to investors who are willing to embrace risks.
- Opportunistic: This has the highest potential for making returns as managers invest in high-risk properties such as underdeveloped lands.
Once an investor chooses the correct fund type, then there’s the possibility of maximizing their returns.
Just like any other type of investment, going into the real estate equity fund should be done with caution and understanding to ensure that you protect your capital. Before investing with a fund, always read the fine prints of the company to ensure it’s what you want. Alternatively, you can let a financial advisor take you through the investment to minimize risks.