In an article just published by Forbes for the Forbes Real Estate Council, Next Realty CEO and Managing Principal Andrew Hochberg shares his thoughts on appealing to and addressing the needs of high-net-worth investors who make real estate investments through pooled funds. These investors represent a group that is more Main Street than Wall Street as they gain strength by pooling their resources with other investors. Andy addresses the particular challenges faced by fund sponsors as they raise the discretionary capital required to invest in commercial real estate on behalf of pooled investor groups.
As a real estate sponsor with more than two decades of experience with dynamic real estate and economic cycles, I have gained tremendous insights and drawn valuable conclusions related to real estate investment, operations and management. Over the course of a recent 90-day fundraising period targeting high net worth investors (HNW), for example, I was reminded that fundraising can be as exhilarating as it is challenging.
Yet fundraising is an essential part of the broader equation to finance investment funds. Harnessing exhilaration and moving beyond the challenges have been instrumental in raising commercial real estate investment (CRE) funds and acquiring more than $625 million in real estate assets alongside our investors.
Our sweet spot among HNW investors is what we call Main Street investors and includes those who place capital in investment funds ranging from $20,000,000 to $50,000,000 and who generally embrace a diverse, multisolution investment strategy. HNW individuals are savvy and informed; they are driven by the aspirational strategy to leverage discretionary capital to create long-term wealth. As they determine which investment vehicles to choose, they often allocate at least a portion of their portfolio to commercial real estate.
In close to 25 years of raising capital, some of the Main Street conclusions I have drawn include:
Sponsor track record and skin in the game equals a powerful combination.
A solid track record showing the performance of previous individual investments and funds is paramount when attracting capital from HNW investors. Additionally, having skin in the game could be the most definitive way a sponsor can demonstrate an alignment of interests with potential investors and underscore its commitment to the fund. Our principals, for example, typically are our fund’s largest investor group, contributing a significant percentage of the capital raised. Collectively, we experience the impact of every investment decision in the same manner as other fund investors.
Liquidity needs differ and change over time.
Just as no two risk profiles are the same, liquidity needs can also be substantially different and dictated by a number of variables. For example, some investors may have pending financial commitments that limit their flexibility and liquidity, while others might have fewer limitations and might prefer longer investment horizons. Additionally, some HNW individuals won’t allocate additional funds for investment, especially into illiquid investments, until they begin to see a return of capital from funds where they already have longer-term commitments. Particular investors might also find that their investment strategies change over time and from fund to fund. It all depends on individual circumstances and tolerance for achieving returns over a longer fund lifespan.
People reach allocation limits.
HNW investors are similar to institutional investors in that they both establish how much capital to allocate to sponsors and to different investment options: real estate, securities, bonds, oil and gas, among others. As market conditions and investment values change, a rebalancing of the portfolio might be necessary to conform to targeted levels. Allocations could also relate to investment with a particular sponsor. Investors might look for a certain level of balance among sponsors to achieve another type of portfolio diversification.
Speed bumps are forgiven.
HNW investors are generally forgiving as long as speed bumps do not turn into sinkholes. Forgiveness is earned by demonstrating focus on successful outcomes and exhibiting an overarching philosophical approach to managing and operating real estate that embraces an executable plan to overcome whatever challenges a property or portfolio encounters. Central to building this trust is transparency, demonstrated by providing forthright and regular communication about the issue, how it is being addressed and appropriate progress updates.
The K-1 rule equals timeliness and accuracy.
Given the long-term nature of most real estate investments, investors are very focused on the timeliness and accuracy of annual tax-related materials. They don’t want to delay filing, run afoul of the IRS or incur any undue scrutiny or penalties that may result. Since our interests and concerns mirror those of our investors, we deliver timely and accurate K-1s.
Take interest in their world outside of business.
Main Street investors often are friends, industry colleagues, members of the same social and charitable circles or fall into the “six degrees of separation.” Additionally, these individuals might have participated in—or be willing to participate in—more than one of the sponsor’s funds. This makes it very natural to develop strong personal connections, support each other’s projects and charities, and find shared interests and common ground outside of the “business” of investing.
Work to reach high net worth investors.
Investing in real estate has become increasingly more popular, particularly given the media attention given to real estate investment trusts (REITs) and the billion-dollar investment funds. For most people, investing in REITs might be among the easiest ways to invest. However, billion-dollar investment funds are out of reach to all but a small group of investors. Finding a mid-range investment fund can open the door to a new group of HNW investors who wish to diversify in real estate investments.
According to statistics, there were 6.98 million HNW individuals in North America in 2020, with that number growing by approximately10% annually. This translates into a great opportunity for smaller fund managers who can differentiate the HNW investor-targeted philosophies and practices they bring to the investment table. When done properly, it can make fundraising a rewarding and exhilarating process.