Tapping private wealth

By all accounts, the rich are getting richer – and there are more of them. According to a new report from property services firm Knight Frank, the number of high-net-worth individuals – defined as someone with $30 million or more in net assets – worldwide increased by nearly 8,700, or 5 percent, in 2012, while their cumulative wealth increased by 2 percent to $26 trillion. Furthermore, over the next decade, the world’s wealthy population is expected to grow by 50 percent to a total of 285,665 people. 

This growth in worldwide wealth is expected to bolster investment in commercial real estate, including private equity real estate, as a survey by wealth advisors pointed to a 25 percent increase in high-net-worth interest in property investment this year. Indeed, high-net-worth investment in property rose from $47 billion in 2009 to $92 billion in 2012, compared to an increase from $4 trillion to $5 trillion for sovereign wealth funds over the same period, according to Knight Frank. 

When it comes to capital raising for commingled real estate funds, high-net-worth capital is helping to fill a void as institutional investors increasingly allocate funds to real estate through separate accounts, joint ventures and other non-commingled vehicles.  

Some of the largest fund managers have raised a substantial portion of their most recent opportunity funds from the high-net-worth channel. In the case of Starwood Capital Group’s latest real estate fund, wealthy individuals made up about 40 percent of the $2 billion that was raised as of August, according to an article in the Wall Street Journal.

Growth projections aside, however, private wealth still is a drop in the bucket for most large firms. Where such investors truly can make a difference is with small to medium-sized managers that lack access to institutional equity. Especially in the face of a challenging fundraising environment, high-net-worth investors can help provide that often illusive seed capital for start-up firms – or more established managers that are launching new platforms – and allow them to better compete in the marketplace. Backing from high-net-worth investors enable these firms to build a track record that eventually could allow them to attract institutional capital. 

Of course, having wealthy individuals as investors has its share of complications. For example, despite their smaller commitment sizes, they can demand disproportionate manager time relative to institutional investors that are writing much larger checks. And, because they are taxable investors, unlike public pension plans, they must invest in separate structures known as feeder funds. Wealth management firms such as JPMorgan and Bank of America Merrill Lynch, however, typically only set up two to four feeder vehicles per year, which somewhat limits the amount of high-net-worth capital that can be raised.

That said, high-net-worth capital continues to serve an important role in private equity real estate, particularly for managers on the smaller end of the spectrum. Considering the shifts in how large institutions are deploying real estate capital, that role could take on a greater significance going forward.