Accredited investors and family offices that invest in cryptocurrencies have a new option to diversify their portfolios with the launch of a real estate fund on Monday.
A Palo Alto, California-based private equity blockchain platform called Swarm Fund provides the underlying framework for the real estate vehicle, called NIAH Fund. Run by Tim Jemison, who has invested in distressed real estate since 2013, the evergreen vehicle is targeting a $10 million raise with an up to 30 percent net internal rate of return.
Swarm will raise capital by distributing a blockchain-based token, called Swarm SUN tokens, which can initially be purchased using one of two cryptocurrenices, bitcoin and ethereum, with an option to buy through fiat currencies, starting with dollars and euros, in the future. Those tokens are then used to invest in Swarm’s funds, including the NIAH Fund.
“I have higher hopes for raising capital for this than I do for a typical crowdfunding gateway”
– Tim Jemison
Concurrently, Swarm launched another vehicle to invest in pre-IPO stock in technology companies. The firm is planning to open 25 vehicles across asset classes through the blockchain platform in the future, Philipp Pieper, Swarm’s chief executive, told PERE.
Unlike a traditional private equity fund, there is no minimum nor maximum commitment size in the NIAH Fund. The vehicle will allow investors to trade positions on a quarterly basis to provide liquidity, Pieper said.
While NIAH Fund is purchased through cryptocurrency, other parts of the fund structure should look familiar to private equity investors. The fund, for example, has a ‘two and 20’ fee structure – involving a 2 percent management fee and 20 percent carry – and has an accreditation platform to ensure compliance with US and other countries’ securities regulations.
The Swarm-backed vehicles, including NIAH Fund, are targeting investors seeking to diversify into alternative assets. Those investors could include international family offices, as well as individuals less likely to be in a traditional private equity real estate fund, such as an investor that has invested the majority of his or her wealth in cryptocurrency, Pieper said. For the latter, NIAH Fund could be a diversifier, backed by hard assets rather than solely volatile virtual currencies.
“The reason why we picked some of the investing areas, such as real estate, is that these are the asset classes where people are comfortable with the metrics,” Pieper said, noting that investors view real estate as a stable, yield-bearing investment strategy.
With capital from NIAH Fund, Jemison’s team will buy single-family homes going through the bankruptcy process, using artificial intelligence to identify assets. The firm uses computer systems to pick out chapter 7 bankruptcy proceedings with real estate assets, and then funnels the overall property list down to specific markets. Jemison used this strategy to purchase properties starting in 2013, when he worked with another real estate startup in a joint venture with a private money lender to buy 400 homes that generated an internal rate of return in the high 20 percent range.
He said the firm could expand into commercial real estate in the future.
“I have higher hopes for raising capital for this than I do for a typical crowdfunding gateway,” Jemison said, citing the ability to raise more capital through a platform that functions similarly to an open-ended fund, rather than raising money for individual deals.
NIAH Fund may be the first cryptocurrency-backed real estate fund, but more are in the works. Realecoin, for example, is seeking to raise up to $50 million to invest in multifamily properties in need of repositioning. Founded by New York City-based real estate investor Ruben Azrak, the fund, which launches later this year, will accept four cryptocurrencies and five fiat currencies and targets a 12-15 percent IRR, according to its white paper.
Blockchain and virtual currencies are still in their infancies, and while they offer benefits such as execution speed, liquidity and the ability to pay with currencies not linked to fiat, there are also drawbacks. Cryptocurrency is notoriously volatile: one bitcoin, for example, was valued on January 1, 2017 at $998 and closed the year at $13,860 after having hit a high of $19,343 earlier in December, according to analytics firm CoinDesk. As reported in July, few private equity real estate firms with whom PERE spoke are currently exploring blockchain technology for fund management or other uses, citing concerns about security and legality, among other issues.
Many industry observers liken the technology’s current stage to the internet decades ago, when new use cases evolved frequently and took time for institutional players to adopt.
Over the summer, Grant Fondo, chairman of law firm Goodwin Procter’s digital currency and blockchain practice, told PERE blockchain adoption could allow real estate managers to both cut costs in its various uses and offer a point of differentiation.
“Blockchain is still in its infancy so it’s not seamless yet,” he said. “But I do think that it’s something that people in the real estate industry should keep an eye on and continue to evaluate whether or not it makes sense for their industry. It has the potential, depending on the industry, to be a difference maker.”