Friday Letter Stand up moms and dads of America

Innovative solutions are needed in today’s fundraising market, including tapping retail investors.  

The chances are that if you are a key man at a private equity real estate firm reading this, you won’t ever have sat in the kitchen of a couple’s home in search of a commitment to your latest fund.

You probably haven’t sipped coffee at the kitchen table, walked through a two-hour presentation on the existing fund’s IRRs and future fund deal pipeline, hoping at the end to receive a check for $50,000. After all, in order to raise the size of fund you had in mind, you would have to pitch an awful lot of couples.

This is gross parody of pitching an affluent ‘retail investor’, of course, as more realistically they come in all shapes and sizes, but whatever their composition, they aren’t the conventional limited partner of a private equity real estate firm. Convention says it is much better to have a healthy global mix of institutional investor, family office and mega high-net-worth individuals for your ten-year opportunity fund that can re-up without a hitch next time around.

Nevertheless, retail investors might increasingly become part of the answer to a question that virtually all firms have had to ask themselves recently: How do we diversify our investor pool and continue to grow?

Fundraising is more of a migraine-inducing experience nowadays. Need it be said, the investor pool has dwindled and funds are shrinking, which is why firms are being innovative and creative to ensure prolonged growth.

Indeed, some of the largest of firms have been spending a great deal of time and brain power assessing answers to this, and one part-solution lies in the retail investor being an additional and completely different source of capital to a firm’s existing client base.

In one case, PERE has learned about an established private equity real estate firm leveraging its platform via the unchartered waters of a real estate investment trust. Under a very live plan, the firm is becoming a sub-advisor where the sponsor is a highly respected US outfit that can leverage a developed network of broker dealers accessing retail clients in America.

The new sub-advisory role isn’t going to replace the firm’s existing model of managing traditional private equity real estate funds or other mandates, but it is a useful adjunct to it. What the firm in question adds to the set-up is its track record and investment expertise.

The approach makes sense. There are structures that exist for retail investors that are not so liquid that investors can just decide to up and leave at any given moment. Plus, given the US retail investor base is so well established and provides a ready-made and very large investor universe, it seems silly to overlook it.

Perhaps more private equity real estate firms should investigate.