Key Takeaways
- • Ari Rastegar, founder and CEO of Dallas-based Rastegar Equity Partners, argues in a D Magazine opinion piece that private equity real estate merits strong consideration for high net worth investors shifting allocations away from hedge funds.
- • Per Preqin data cited in the piece, closed-ended private equity real estate funds held a record US$239 billion of dry powder at December 2016, up from US$210 billion in 2015 and US$132 billion a decade earlier.
- • Preqin reports private equity real estate deal flow slowed in 2016 amid market volatility, the Brexit vote, China concerns and US election uncertainty, though managers invested more capital in 2016 than in 2014.
- • EY's 2017 outlook expects a "softer landing" if the property market turns, given lower development levels than at the 2006 cycle peak, while flagging high pricing and political uncertainty as risks.
- • The article describes a typical structure of 7-10 year pooled funds with a 2% management fee and 20% carried interest above a hurdle rate, with the scale ranging from US$10-25 million funds to multi-billion-dollar vehicles for institutions.
Summary
In a D Magazine opinion piece, Ari Rastegar, founder and CEO of Dallas-based private equity real estate firm Rastegar Equity Partners, argues that private equity real estate deserves serious consideration as high net worth investors, including CEOs, doctors and attorneys, adjust asset allocations amid what he describes as disruptive regulatory and political change. He contends that many such investors are moving out of hedge funds and into private equity, and that private equity real estate can deliver tangible returns and preserve capital in a yield-starved market.
The article distinguishes private equity real estate from REITs, describing it as professionally managed pooled funds that typically invest in multiple assets over a seven to ten-year period, sometimes shorter. Fund sizes range from US$10 million to $25 million at the smaller end to tens of billions of dollars at the top, where participation is generally limited to institutions such as endowments, superannuation funds and pension plans. The general partner earns a management fee, typically 2% of assets under management, plus carried interest, commonly 20% of net profits above a hurdle rate. Rastegar notes that Blackstone, Starwood Capital, KKR, The Carlyle Group and Oaktree Capital Management are active in the sector.
Citing Preqin's 2017 outlook, the piece reports that closed-ended real estate funds held record dry powder of US$239 billion at December 2016, up from US$210 billion in 2015. Preqin notes that deal flow slowed in 2016 due to financial market volatility, the Brexit vote, concerns over the Chinese economy and pre-election uncertainty in the US, and that managers face a more crowded market for attractive opportunities, yet still invested more capital in 2016 than in 2014.
EY's 2017 outlook, also quoted in the piece, acknowledges that many global markets face a possible slowdown, but notes that lower economic growth and development levels since the last cycle leave markets in a stronger position than at the 2006 peak. EY writes that "should the market turn, we expect a rather softer landing this time around," while citing high pricing, political uncertainty and trade concerns as reasons for caution. The article concludes that record dry powder positions the sector to capitalize on any cyclical downturn. Rastegar's firm focuses on income-producing, recession-resilient commercial real estate, including self-storage and discount retail.
The article distinguishes private equity real estate from REITs, describing it as professionally managed pooled funds that typically invest in multiple assets over a seven to ten-year period, sometimes shorter. Fund sizes range from US$10 million to $25 million at the smaller end to tens of billions of dollars at the top, where participation is generally limited to institutions such as endowments, superannuation funds and pension plans. The general partner earns a management fee, typically 2% of assets under management, plus carried interest, commonly 20% of net profits above a hurdle rate. Rastegar notes that Blackstone, Starwood Capital, KKR, The Carlyle Group and Oaktree Capital Management are active in the sector.
Citing Preqin's 2017 outlook, the piece reports that closed-ended real estate funds held record dry powder of US$239 billion at December 2016, up from US$210 billion in 2015. Preqin notes that deal flow slowed in 2016 due to financial market volatility, the Brexit vote, concerns over the Chinese economy and pre-election uncertainty in the US, and that managers face a more crowded market for attractive opportunities, yet still invested more capital in 2016 than in 2014.
EY's 2017 outlook, also quoted in the piece, acknowledges that many global markets face a possible slowdown, but notes that lower economic growth and development levels since the last cycle leave markets in a stronger position than at the 2006 peak. EY writes that "should the market turn, we expect a rather softer landing this time around," while citing high pricing, political uncertainty and trade concerns as reasons for caution. The article concludes that record dry powder positions the sector to capitalize on any cyclical downturn. Rastegar's firm focuses on income-producing, recession-resilient commercial real estate, including self-storage and discount retail.
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