What is private equity real estate?
Private equity real estate refers to the pooling of funds, typically from institutional investors but also from others as we shall see, that are then used to purchase public and private commercial real estate assets. Institutional investors, having to deploy hundreds of millions of dollars, if not billions of dollars, simply don’t have the bandwidth to be able to evaluate every single real estate deal that might be worthy of their investment.
Enter private equity funds, that sit between the large institutional investors and real estate sponsors with individual deals out in the market. These private equity funds charge a fee to their investors for managing the invested capital, usually between 1% and 2% a year, while also taking compensation based on performance.
The private equity fund’s primary role is to identify high caliber real estate sponsors, underwrite their deals, and invest in them on behalf of their institutional capital providers.
What has changed dramatically over the last few years, transforming the way to private equity world works, is that while access to the best sponsors was historically the domain only of private equity funds, it has now opened up to all accredited investors anywhere. Sponsors on are no longer restricted to seeking capital from private equity funds but can now raise money online from anyone and this all stems from changes in the law that now permit general solicitation. Put another way, sponsors can now come to individual investors directly whereas before this was prohibited.
The impact of these changes is primarily at the lower to midrange of the investment scale i.e. up to around $50 million in deal size. Anything larger than that still remains typically in the private equity fund world, but even there so there are exceptions.
In short, private equity real estate is less about the real estate itself, and more about the way that real estate is financed.
