DOES SIZE REALLY MATTER?
BIGGER IS NOT ALWAYS BETTER.
For investors searching for diversification and
yield via real estate, private equity funds can
provide a solid play. And while large-cap
private equity real estate funds are known for
making billion-dollar deals and scoring
top-notch properties, they may not be performing as well as their smaller competitors.
TRACK RECORD FOR SMALL VS. LARGE REAL
To demonstrate how the smaller real estate
funds are outperforming the mega funds,
consider Origin’s study, in which they
compared the relative performance of funds
with less than $200 million in assets under
management to funds with more than $1
billion under management.
Graph 1 clearly shows that for the 10 years
ended 2017 smaller funds generated significantly higher average returns outpacing
their larger cousins by 68%.
HOW SMALLER FIRMS CAN DELIVER HIGHER
What makes the small private real estate
funds able to run ahead of the pack?
;e reason they come out on top in terms of
1. Alignment of Interests
performance is three-fold:
Small fund managers strive to be closely
aligned with their investors, especially
when the principals themselves have a
signi;cant share of their net worth on the
line and maybe even a personal relationship with their investors. In other words:
‘skin in the game’.
Whereas a multibillion-dollar manager
aims to build assets under management
because their allegiance is not necessarily to
fund investors but rather to shareholders.
2. Leveraging Strengths & Relationships
Smaller funds leverage market knowledge
and relationships to locate opportunities
that are below the radar for the bigger
funds, such as early noti;cation or
o;-market opportunities. ;ey also leverage
their strengths to deliver bigger returns.
3. Less Fees
A double layer of fees is one of the biggest
reasons for the underperformance of large
funds. To explain, a real estate fund’s size
dictates its ability to e;ectively invest
capital as well as its strategic priorities.
Consider a large fund with billions of
dollars to invest must depend on the
platforms of other managers to deploy
those funds. ;is means that large ;rms
frequently partner with regional operators
to invest those large amounts, maintain a
steady deal ;ow and pay them, as well as
themselves, before their investors.
Whereas, investing with a smaller manager
means fewer people requiring a cut of the
pie, so investors can earn higher returns.
At the end of the day, the little guys may
not have the over-the-top names, but they
tend to have a more agile and e;cient
structure, a more laser-focused investment
strategy and set realistic timeframes to
execute them successfully.
Given this, investors may be more
successful in achieving their ;nancial goals
by asking their advisors about higher-performing smaller private funds.
Greg Placidi, MBA, CFA, is the Chief
Investment O;cer & Portfolio Manager at
Equiton. Equiton is a private equity ;rm that
specializes in providing private market real
estate investments to Canadians. For more
information, visit www.equiton.com
GREG PLACIDI, MBA, CFA
CHIEF INVESTMENT OFFICER
& PORTFOLIO MANAGER,
SOURCE: ORIGIN INVESTMENTS, PREQIN
GRAPH 1 > AVERAGE FUND PERFORMANCE / NET INTERNAL RATE OF RETURN 2007-2017
FUNDS WITH ASSETS > $1 BILLION
FUNDS WITH ASSETS < $200 MILLION