When it comes to private equity, large asset managers rule a majority of the conversation surrounding investment opportunities. Since their names have become synonymous with private equity, many assume that these big managers can generate the largest returns for investors. However, the average rate of return for these larger companies that have at least $1 billion in assets only clocks in at 5.7%, while funds who manage $200 million or less boasted a return rate of 11.2%. If smaller firms manage less money, how are they seeing a higher rate of return?
Shareholders vs. Investment Partners
Large private equity funds are typically large in every way, meaning that they have a large amount of people working for them and have to allocate part of their returns to their shareholders. Additionally, large funds usually have to rely on regional managers who deploy hefty sums of money and maintain managed properties. These managers need to be paid. Smaller funds do not rely on middlemen, and therefore do not have another level of employees or partners to pay. This means investors earn higher returns because the funds are allocated to them.
Local vs. Global
Almost all aspects of real estate thrive at the local level. Knowing research trends in a specific market, as well as being in proximity to investment opportunities allows smaller funds the chance to visibly see an opening in the market that has potential. Larger firms operate on a more global level, meaning that they have to rely more heavily on projections. While projections can help determine the quality of investment, they are more subject to change considering all of the variables that are associated with real estate.
Funds vs. Investors
Smaller funds are generally investing money alongside their partners, and that makes them more likely to find quality properties that will yield high returns. Managers at small funds will have a better relationship with their investors and understand the risks they are taking to invest because they are taking the same risks. At larger firms, managers are unlikely to meet a majority of their individual investors because they have layers upon layers of people in between them.
As a whole, smaller private equity funds are underrated, for they offer better rates of return than larger funds. The real estate industry, however, is configured in such a way that makes it difficult to find smaller funds to become involved with since, as previously mentioned, large funds dominate much of the conversation and a majority of high-profile investments. If you’re interested in investing in real estate private equity, consider using out-of-the-box research to find funds that are more closely aligned with you and your personal goals.