Real Estate Capital Raising Trends with Jim O’Brien
Jim O’Brien, Managing Director in Baird’s Real Estate Investment Banking group, recently attended Market Group’s 9th Annual Private Wealth Latin America & the Caribbean Forum in Miami. At the conference, Jim joined panelists to discuss the benefits and drawbacks of real assets and real estate in the well-attended panel “From Real Estate to Real Assets: Seeking the Best Opportunities.”
With the real estate markets seeing continued effects of COVID-19 and deal volume lower across international markets, the bulk of the conversation addressed how real estate companies / sponsors are exploring a range of solutions to secure capital. Read more on this and other takeaways from the discussion.
- Investor interest in anchor LP structures continues to gain momentum. Investors are increasingly willing to come into investments as an anchor LP. Companies that secure an anchor LP can leverage that institutional investor’s commitment to raise additional capital for a fund. The sponsor is expected to continue raising additional LP capital from institutions, family offices, and/or broker dealer networks to combine with the anchor LP.
To be clear, this is not an investment of discretionary capital in a fund. Rather, the anchor LP maintains control of their capital through the creation of an investment committee whereby the anchor LP has one of three seats, and all new investments require a unanimous vote. The anchor LP investor receives 25% of the GP promote with a pro rata share of all fees including asset management and acquisition fees, though property management fees are typically excluded. This type of structure is a compelling alternative to a corporate entity-level investment. For the anchor LP, benefits of this structure include increasing returns by sharing in the economics of the LP and GP.
- Joint ventures and entity-level investments still in vogue. Investors continue to seek companies / sponsors who are leaders in their respective asset classes and markets with the proven ability to create value and produce attractive risk adjusted returns. Building on this long-time trend, today’s investors have a growing interest in partnering with companies to create joint ventures around currently owned assets for new acquisitions. Most investors seek a co-investment (5-10%) from the company / sponsor, as well as day-to-day management and oversight, and also require a clear understanding of the business and potential exit strategies. Meanwhile, entity-level investments occur when an institutional investor makes an investment at the entity-level whereby the investor purchases a significant position in the company.
- Sidecar LP structures are a unique alternative to raise capital. A sidecar structure provides the sponsor additional buying power and garners incremental fees and promotes. The unique structure is an alternative to a direct fund investment and also allows existing investors in the fund to participate in additional investments and utilize the Fund as a “GP platform.” Additionally, the fund earns fees and promotes on the sidecar investment and the structure assumes no investment into the GP.
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