The popularity of co-investments in the real estate asset class continues to be lower than in private equity, despite the appeal of investing alongside funds with a lower carry and cost structure.
According to PERE’s Investor Perspectives 2021 Study, a little over a third – 37 percent – of respondents plan to participate in co-investment opportunities over the next 12 months, the same percentage as in last year’s study.
For those with the appetite for it, co-investments continue to be seen as a way of potentially boosting returns while cutting costs compared with direct fund investments.
“I’m still seeing co-investments, particularly among larger investors. They look at it because the co-investment vehicles usually have reduced fees and carry, which offers better overall blending economics,” says Matt Posthuma, real estate funds partner at global law firm Ropes & Gray.
Despite the advantages that co-investment offers, 63 percent of investors say they are not looking to pursue the strategy in private real estate.
In contrast, appetite to co-invest in the wider private equity space continues unabated, with 71 percent of investors polled planning to participate directly in deals alongside managers in the year ahead, according to sister publication Private Equity International.
“I see co-investment more commonly on private equity funds,” says Simon Vardon, global head of real assets at fund administrator Sanne.
“For real estate deals with a proven real estate asset manager, it remains quite common that the largest investors will invest alongside the asset manager in pure joint venture arrangements outside of fund structures. For real estate funds, where local expertise is required for a particular project, a local asset manager/developer will be involved and it’s usual for that party to have an equity stake in the project, alongside the fund and any co-investment from investors.”
The biggest factor cited by Perspectives 2021 respondents as hindering their participation in co-investments is insufficient staffing, followed by a lack of available opportunities and challenges in reaching the required speed to conclude transactions.
“Investors need to take a more active role when they decide to co-invest and that requires some degree of capacity internally. Some investors say they want co-invest rights but when they are presented with the opportunity to make an actual investment, it’s challenging because they might not have the people, the abilities or the manpower to effectively get involved in co-investment,” says Edward Tran, partner at Katten Muchin Rosenman, a multinational law firm.
“Investors might have a team that evaluates real estate, but they might not have an operational team that actually manages real estate, so if they’re going to co-invest they may have to think about bulking up their teams.
“The idea of co-investment is quite popular, but it’s driven by the deals on the table and today people are doing fewer deals because of market uncertainty and turmoil. As the overall number of real estate transactions decline, the number of co-investments will also decrease.”