As you pursue a career in real estate private equity, you may wonder where REPE firms get the money to invest in properties. Beginners are generally unfamiliar with the various investor categories in private equity funds. There are six key investor types in the real estate investment space.
High Net Worth Individuals
Wealthy individuals generally invest with real estate private equity firms through an intermediary like an RIA (Registered Investment Advisor). Many REPE firms will work with a Broker-Dealer to list their funds with a network of RIAs. This is similar to how mutual funds are sold to individual investors, but with REPE funds, the investors must qualify as Accredited Investors (in general, they must have an annual income of at least $300,000 or a net worth of at least $1 million excluding their home). The advantage of working with Accredited Investors is that the regulatory requirements are much lighter for the REPE fund, and the minimum investment is much larger (normally $100,000 or more).
Some private or family businesses will generate significant investment capital, either through recurring profitability or a sale of some or all of the business. Often the investable capital grows to a point that the owner can afford to hire a full time investment manager. Some family offices have a single manager, but some form a separate company with a staff of dozens or more.
Insurance companies must invest their policyholders’ monthly or annual premiums in order to be able to pay out claims as they arise. Property insurers may seek out real estate investments that are not geographically tied to their insured portfolio as a diversification strategy. Life insurers have less concern over geography.
Pensions are very much a thing of the past in the private sector, but in the public sector, pensions are still the primary retirement vehicle for most employees. The largest pension funds are associated with states or with federal agencies. Much like insurers, pension funds must invest monthly contributions from the employer to generate income that is used to make payment to both existing and future retirees.
Public or charitable organizations often accumulate significant donations that are invested in order to generate recurring revenues that benefit the organization. Local communities, religious institutions, hospitals and universities frequently have endowments. The endowment board of directors set investment policies and strategies. Real estate is often one slice of their overall investment strategy in addition to stocks, bonds, and other investments.
Sovereign Wealth Funds
Sovereign wealth funds are owned by governments that benefit the citizens of that country. Countries that run a budget surplus due to exporting natural resources such as oil will often invest those surpluses around the globe to achieve yield, offset currency risk, and diversify earnings outside of their own economy.
Understanding where REPE funds gets their investment capital is a good way to stand out in a job interview. Or you can ask questions of your interviewer as well. The types of investors will give a good indication of the size of projects that the firm seeks and the amount of deal flow you may see in a year. Your career in real estate private equity can easily be shaped by your firm’s source of investment capital!