In today’s world, many of the goods, services, and products we see every day are from private equity-backed companies. Private equity is a foundational concept for anyone interested in investing, whether they are investing in the traditional market or commercial real estate.
It is an alternative investment class where money (capital) is invested into a fund that goes toward directly investing in companies or properties. Private equity firms use this type of investment with the goal of increasing the asset’s value over time and eventually selling it at a profit. These firms use capital raised from limited partners, including the creation of private equity funds, to invest in promising properties or other assets.
These are pools of capital meant for investment in assets, such as properties, that present an opportunity for a high rate of return. They tend to come with a fixed investment horizon, typically ranging from four to seven years. The firm then hopes to make a profit by using an exit strategy to sell the asset.
Firms raise capital from accredited and institutional investors for funds to invest in different types of assets. Some of the most popular types include distressed funding, leveraged buyouts, venture capital, fund of funds, and real estate.
Money in distressed funding is invested into troubled companies with underperforming business units or assets. The goal behind this type is to turn the companies around by making the necessary changes to management or operations. Alternatively, private equity firms may choose to make a sale of that company’s assets for profit instead.
Leveraged buyouts are one of the most popular forms of private equity funding. These involve buying out a company completely with the intention of improving its business and financial health. The firms use a variety of strategies to improve the company, from slashing employee count to replacing management teams. The firm then resells the business for profit to another interested party or by conducting an initial public offering (IPO).
Venture capital refers to when investors use funding to provide capital to entrepreneurs. This can include seed financing, early-stage financing, and Series A financing. Typically, investors provide financing to those companies or small businesses that show long-term growth potential.
Fund of funds is a type that focuses on investing in other funds, usually of the mutual or hedge variety. This type offers a backdoor entry to investors who cannot normally afford the minimum capital requirements needed for those types of investments.
Real estate private equity are funds used to invest in commercial real estate properties or real estate investment trusts (REITs). The difference between the two lies in how each is applied. A REIT is typically a corporation, trust, or association that invests directly in income-producing real estate. It may also be traded like a stock. Meanwhile, a real estate fund is a type of mutual fund primarily focused on investing in securities offered by public real estate companies. Real estate private equity saw a surge following the 2008 financial crisis.
In many cases, there are long holding periods in order to ensure a turnaround for distressed companies or to allow for liquidity events such as IPOs or sale to a public company. The amount of time an investor or firm holds an asset largely depends on the asset itself and the strategy the investor or firm chooses to use.
Private equity real estate funds allow high-net-worth individuals and institutions to invest in equity and debt holdings related to real estate assets. Usually, general partners invest in a variety of property types in different locations, ranging from new developments and raw land to complete redevelopments of existing properties. In some cases, investors may pursue a core or core-plus strategy, where the property needs little to no redevelopment. These kinds of properties have the potential to offer predictable cash flow.
Within these types of real estate investments, capital is commonly pooled and structured as limited partnerships, limited liability companies, S-corps, C-corps, collective investment trusts, private REITs, and other structures.
Investing in private equity normally requires an investor with a long-term outlook and significant upfront commitment, though this depends on the offering. Funds created for individual investors generally require the investment to be funded at the time of signing the investment agreement, but funds created for institutional investors require a capital commitment. This means upon signing the agreement, the capital is drawn down as suitable investments are made. If no investments are made during the period specified in the investment agreement, nothing can be drawn from the commitment. In other words, the institutional investor is not required to immediately fund the investment, but commits to potentially funding the acquisition of an asset.
There are a variety of private equity real estate investments available. These can include office buildings, flex-industrial properties, and multi-family apartments. More niche property investments include properties such as hotels, self-storage, medical offices, or senior housing.
Despite less financial flexibility and liquidity when compared to other investments, this type may provide high potential levels of income with strong capital appreciation. Annual returns for core and core-plus strategies tend to average somewhere in the 4-13% range. Returns for value-add or opportunistic strategies may be even higher. Though not guaranteed, many investors see this as an advantage to this type of investment.
Private equity funds may be out of reach for many investors because they tend to require a substantial minimum contribution. For example, some of these funds allow you to buy in at as little as $25,000. Others may have capital contribution requirements that reach up to the millions.
As a result, many investors are those who are highly experienced, accredited investors, or institutional investors. They may have a longer-term outlook or financial plan. There are also family offices comprised of professionals specifically hired to manage the wealth of families, such as those who have come into an inheritance or groups of high-net-worth individuals.
Institutions may also choose to invest in private equity funds. In fact, they tend to be the most prominent investors in private equity real estate. Institutional investors include hedge, pension and mutual funds, endowments, banks, and insurance companies. Select third parties, such as asset managers, may also invest on behalf of institutions.
Hedge funds are a type of alternative investment that uses pooled capital to earn returns for its investors. Similarly, private equity funds also use pooled capital, but choose to focus on companies, properties, and larger assets to bring returns to their investors. This is especially true in commercial real estate, where some private equity firms specialize solely in commercial properties.
Private equity real estate funds are commonly pooled and structured as limited partnerships (LPs), limited liability companies (LLCs), S-corps, C-corps, collective investment trusts, private REITs, or other legal structures. It largely depends on the institution and the agreement between the investor and the private equity fund holder. Investors benefit from reading the terms before agreeing to adding their capital to the pool, so that they might better understand the expectations and potential returns.
Avistone is a commercial real estate investment firm that focuses on the acquisition and operation of multi-tenant flex and industrial properties. We also focus on the acquisition and asset management of hotel properties nationwide.
Accredited investors have the opportunity to purchase equity shares with the potential to receive monthly cash distributions and capital appreciation. To provide the best outcome for our investors, we acquire properties located in dynamic markets with proven demand, strong economic indicators, and historically high occupancy rates.
Contact us today to learn more about our current offerings.
This communication is intended solely for accredited investors as such is defined in the Securities Act, and is not intended as an offer to sell, or the solicitation of an offer to buy any securities or ownership interests. The opinions and forecasts expressed herein are solely those of Avistone, LLC, as of February 24, 2023, and subject to change. Actual results, future events, predictions, circumstances and events will vary and be different from those set forth herein, and there are no guarantees that any positive or successful results, express or implied, by investors will be realized. Avistone specifically disclaims any right or obligation to provide investor returns at forecasted levels. Avistone’s track record from 2013 to December 2022; no guarantee of future results. The performance information of Avistone’s prior projects has not been audited by any third-party. The track record metrics reflect the weighted average performance of all our clients, and not every investor experienced exactly these same returns. Any and all evaluations for investment purposes must be considered in conjunction with a final Private Placement Memorandum (the “PPM”); all prospective investors are strongly encouraged to read all “risk factors” in the PPM. Further, some of the initial information provided above contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve numerous risks and uncertainties, and investors should not rely on them as predictions of future events. Investments in private securities contain a high degree of risk and often have long hold periods. They are illiquid and may result in the loss of principle. Avistone’s strategy may not occur due to numerous external influences.