Lazard: Appetite grows for niche, focused strategies

Institutional investors are increasingly looking to allocate to more specialist managers, says James Jacobs, head of real estate for Lazard’s private capital advisory group.

James Jacobs

Over the past three months, we have noticed an increase in institutional investors’ appetite to commit capital to more focused investment opportunities. The rationale is often cited as a desire to access specific markets, sectors or strategies; gain exposure to expert management; and diversify real estate portfolios.

One of the primary benefits of investing in specialist real estate funds is access to specific opportunities. For example, these funds may focus on specific countries or regions that are going through a dislocation, such as Sweden. Alternatively, they may focus on specific sectors, such as residential, industrial or alternative sectors like life sciences, cold storage and healthcare. They may also specialize in a strategy, such as real estate credit or secondaries. By investing in these funds, investors can gain exposure to opportunities that benefit from growth, structural imbalances or market dislocations.

Expert management is another benefit. These are teams with local market knowledge, relationships and networks, and are directly responsible for sourcing, underwriting and structuring investments. Their approach is typically to focus on operational assets that require more hands on, day-to-day active management. In the case of operationally intensive real estate, such as life sciences, the management team’s specialist knowledge, familiarity with tenants and respective business plans help to underwrite the investment opportunity.

Often these specialist managers are vertically integrated with local teams and on-the-ground resources. This has the benefit of increased control, reduced cost leakage and tighter gross-to-net spreads.

Investing in focused strategies can also provide diversification benefits to an investor’s portfolio. By investing in a fund that specializes in a specific type of property, investors can gain exposure to a different asset class that may not be correlated with other investments in their portfolio. This can help reduce overall portfolio risk and volatility. Additionally, these funds can enable investors to manage their portfolio construction and overweight specific markets, sectors or strategies that are hard to access and require expert management that has the potential to generate higher returns.

As the market environment evolves and alternative sectors become more mainstream, we expect a greater number of investors to allocate to specialist managers alongside their existing, diversified exposure.