Investors are mixing it up in their real estate portfolios with funds-of-one, co-investments and separate accounts gaining popularity.
While not new in other asset classes, these structures are now gaining traction among real estate investors because they like the control and the lower fees offered by non-commingled fund structures.
Some 37% of institutional investors were investing in or considering a real estate co-investment as of Aug. 31, up two percentage points from January 2012. Another 37% of investors are investing in or considering an investment in separate accounts as of Aug. 31, according to data shared by London-based alternative investment research firm Preqin.
The non-commingled investments are more popular in other asset classes, such as private equity, because those deals generally are bigger than real estate transactions.
But today's tough fundraising environment is leaving some real estate managers without money at a time when attractive deals are proliferating, said Margaret McKnight, San Francisco-based co-chief investment officer of Metropolitan Real Estate Equity Management LLC. As a result, the managers are becoming more open to custom investment programs. Metropolitan is a real estate funds-of-funds manager acquired last week by Washington-based alternative investment manager Carlyle Group.
Institutional investors culled their roster of real estate managers after the recession and now are developing platform relationships such as funds of one — funds with a single limited partner — with managers they are retaining, said Heather Harlan, counsel in the fund formation practice of law firm Mayer Brown in an interview. Based in the firm's Chicago office, Ms. Harlan represents both institutional investors and alternative investment managers.
In a fund of one, the limited partner can invest across strategies within the asset class depending on investment conditions at the time. By contrast, a commingled fund must maintain the strategy for which it was established over its lifetime, Ms. Harlan explained.
In addition, these structures are not tied to a particular term, so a manager doesn't have to sell because it needs to distribute capital before it can raise a new fund. Fees are generally lower, she added.