Diversity can be a driver of strong performance in real estate managers, debunking a common industry misconception, according to the latest data from Chicago-based alternative asset manager GCM Grosvenor.
In GCM Grosvenor’s study of 264 diverse real estate emerging managers from 2012 through 2018, upper-quartile diverse firms outperformed or matched the performance of their upper-quartile general cohorts in the Burgiss real estate index in six out of seven years. The data was published for the first time in a report, in February, by industry association NAREIM. GCM Grosvenor defines a diverse manager as having 25 percent or greater ownership by women or other minority groups.
Notably, these diverse managers outperformed their respective general peers in 2018 by a more significant margin than in previous years, generating an internal rate of return of 21.2 percent – more than double that of the 10 percent IRR in the Burgiss index – and a multiple on invested capital of 1.58x, compared with 1.06x in the benchmark, according to the NAREIM report. Previously, these diverse firms exceeded the performance of their general counterparts at most by 4.6 percentage points in terms of IRR and 0.34x in terms of multiple.
The diversity edge
Peter Braffman, managing director of real estate investments at GCM Grosvenor, points to two key reasons for diverse managers’ outperformance. One is their general focus on less competitive areas of the private real estate market. “In the emerging and diverse area, it’s just more fragmented, so in theory you’re able to find better opportunities, just because they’re smaller, there’s less capital chasing it,” he says.
“It is their edge. You’re getting a part of the market that’s typically harder to get when you invest with larger groups.”
Speaking specifically to the 2018 performance numbers, Braffman notes that, by comparison, much of the market in which the broader real estate universe was competing was flush with capital: “One of the things that was definitely happening in 2018, 2019 [and] leading up to covid, is there’s been a ton of capital flooding the markets, so returns have become competitive and harder to get in the broader market.”
Moreover, many general managers were still in the middle of repositioning assets in 2018, whereas diverse managers benefitted from being able to sell sooner and realize some gains, he adds. “The lower end of the middle market generally has more liquidity than any other part of the market. Managers can aggregate assets and sell to larger players or can sell off to smaller, less institutional buyers.”
The other driver for diverse real estate managers is their tendency to be specialists. Of diverse firms, 28 percent were diversified across multiple strategies, compared with nearly 50 percent for mature managers, per GCM Grosvenor data.
“It can help get that extra return,” Braffman observes. “If you want to focus on certain sectors, it’s much easier to do that if you’re focused with these small managers and diverse managers.”
But he cautions against putting too much emphasis on any one performance year. “It’s so important to look at this over long periods of time as opposed to one year. If there’s many years where the trend is good, then that’s where I’d focus.”
Deborah Harmon, co-founder and chief executive at Maryland-based manager Artemis Real Estate Partners, says her own firm’s decade-long track record of investing with diverse partners supports GCM Grosvenor’s findings. “Diversity directly and positively impacts the bottom line. Diverse teams can be more challenging to create and lead but have the potential to outperform by identifying different business risks and opportunities and inoculating against groupthink.”
The GCM Grosvenor data refutes the common misconception that investing with diverse firms means sacrificing performance. Robert Sessa, head of real estate at the Employees Retirement System of Texas, told PERE in a 2018 interview that diversity was not the top goal of the pension’s emerging manager program. “A byproduct of this program is definitely supporting women or minorities, but we’re out there to earn returns,” he said. ERS declined to comment for this story.
“It seems to me that unconscious bias, perhaps even conscious bias, continue to work against women and people of color,” Harmon says. “There must be intentionality with respect to investing with diverse-owned and diverse-led firms as race- and gender-blind policies have largely maintained the status quo. Investors construct portfolios in which unintentional allocations and historical inequities do not maximize potential for the outsized risk-adjusted returns that diverse firms can provide.”