Superior returns depend on 1 key ingredient. Structure. Private Equity (PE) has been returning higher yields, lower volatility, bettering Sharpe ratios across portfolios for years. For smart money managers, it’s their secret sauce. They use PE to balance their clients’ volatile equity portfolios. Pensions are placing more capital to private equity every year because of its superior returns, low volatility and correlation to the stock market. While regular funds, fixed income, equity funds continue to ignore this huge universe of opportunities.
In no order, 4 ways private equity real estate (PERE) is better than funds (single asset) or Real Estate Investment Trusts (REITS).
REITS are constrained to what they can do
Like a chameleon, Private equity real estate can create any structure in which to adapt to market conditions or opportunities. If markets are bad, funds can be created to buy market distressed properties or distressed properties with value added strategies. PE can manufacture funds and customize every aspect of the fund (time, size, strategy, asset class, leverage, structure), making allocation and modeling for investors easier as every fund is completely autonomous and not cross collateralized as in a REIT. REITs cannot buy in other sectors of real estate as they will be seen as diluting focus. A PERE fund never has that issue because every fund is separate, even the operating team can differ.
Single asset funds have less governance than other structures
Private equity real estate can have better governance. Trebuchet makes it better by combining public company governance within a private fund. We place a full majority independent board on every fund, specific to that fund. For the investor, this provides the best talent, governance, and oversight possible. Governance is lacking in deal by deal funds and most funds in general. Those funds typically operate with an advisory board. That board has no input other than advice, which the General partner can choose to ignore. This is in stark contrast to public company board accountability and governance. Trebuchet takes the public model and combine it into our PE model, providing the best of both worlds.
Funds don’t tend to initiate this process because of the time consuming difficulty in finding directors of any weight and is expensive for the General Partner. It also concedes the General Partner’s absolute control over the fund. Trebuchet is ok with this because of our strong alignment with the investor in every fund.
Single asset funds concentrate risk
A PERE fund can build a portfolio of properties, diffusing geographic and asset risk. We do this in several ways. A smaller fund with a fully committed pool of capital and a focus on 2 tight geographic areas. It can then deploy small amounts of capital, $100 million to $200 million (fully leveraged) very quickly. Larger funds of over $200 million of leveraged capital, focused on buying existing assets, the fund should commit capital traditionally for maximum IRR. With 10% being initially committed into the fund, with further capital calls as assets are acquired until the fund is fully allocated. By having multiple funds, the plan sponsor (Trebuchet Capital Partners) is able to have a facility where investors can re-allocate their dividends/interest/distributions as or more cost effectively as public companies. Asset chasing, severely limits any benefit of economy of scale with these deal by deal single asset funds. Placing them at a disadvantage on an IRR or equity multiple over traditional PE structures that can scale.
REITS cannot build and if they do they are less efficient
By law, REITs cannot build, they can only buy and operate existing assets. To circumvent, management of the REIT or management appointed by the REIT creates a separate entity. The REIT loans the entity the capital, the managers sell the finished building to the REIT with a standard 10% markup. The markup over the base cost of labor to build is unknown to REIT investors and REIT board of directors. This lack of oversight should be cause for concern to investors, but is surprisingly overlooked by the media and owners of REIT stocks. A better way is to create a purpose built fund, with independent directors that have building experience governing the underlying structure on behalf of the investor. This reduces risk, cost overruns and tightens the project to focus on the process as well as the exit. Building funds can be exciting and interesting as their horizons can be shorter, capital allocation almost immediate. The risks differ with building funds over acquiring existing assets.
In conclusion, the functionally, yield, risk mitigation, and access to broader sectors provided by Private Equity should be compelling for any investor not allocating to this alternative to take a second look. If you want to learn more or are actively allocating to this sector contact us here: Contact
Source: Trebuchet Research
This material is contains information from publications prepared by the Trebuchet Capital Partners and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of June 2015 and may change as subsequent conditions vary. The information and opinions contained in this post are derived from proprietary and nonproprietary sources deemed by Trebuchet to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by Trebuchet, its officers, employees or agents. This post may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this post is at the sole discretion of the reader.