Boutique is Better
What makes one private real estate fund perform better than another? Simply put, it’s strategy. Sorted capital is hyper focused on a small asset category in one concentrated location. Add that to our ability to move quicker than large mega funds and it equals better returns. Boutique funds in general outperform their larger, sluggish, counterparts. To confirm that size doesn’t matter we turn to Preqin data.
Funds with over $1 billion in assets return average annualized returns of 11% from 2007-2017. Funds under $200mm returned 18.5% during the same time period. We echo Preqin’s follow-up to this comparison: “there are likely to be many reasons for this, with smaller managers potentially more nimble when making investments and newer firms more motivated to prove their worth.”
RE Fund History
Preqin offers an endless amount of data on fund performance for analysts to pour over. To simplify we looked at private real estate fund performance over a 10-year period (June 2007-June 2017). Over that period all funds combined managed an average net IRR of 13.8% and cash-on-cash multiple of 1.4x. That is quite impressive when comparing to the S&P 500 which only managed 7.13% over the same period (iShares S&P 500 Index). It’s an even more impressive benchmark when compared to iShares US Real Estate ETF which delivered a meager 4.69% annualized return.
RE is Better
Real estate can build wealth and also act as a hedge against the stock market. Real estate has a low correlation to stocks and bonds, rising and falling (excluding REITS). Among other benefits quality properties tend to keep pace with inflation, hold their value, and offer tax advantages. A Tiger 21 survey found that high-net-worth investors representing $51 billion in assets had on average 33% of their portfolios in real estate investments.
Our Funds operate through an LLC structure, which means that all tax benefits (such as depreciation and interest expense) pass through to investors. In a REIT structure, the tax benefits are captured at the REIT-level and any income paid out is taxed at the ordinary income rate.