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Leveraged Breakdowns

Real Estate Private Equity M&A Investors: What They Do, What They Buy, And How they Choose to Buy It


This article follows an interview format to help you develop your real estate private equity skills. Assume you’ve been asked each question during a live interview. Practice until you can answer from memory, without referencing our pre-written responses below. We challenge you to rephrase your responses — we’re always here in the forums if you need a real estate private equity guide to check your answer.

As succinctly as possible, please describe what corporate-level REPE M&A investors do.

In real estate private equity, the corporate M&A investment teams want to purchase public companies at a discount to their relative value. That means they independently calculate their own opinion of value, then compare their opinion of value relative to the market price. If their independent opinion of value is higher than the market price, that’s theoretically free money on the table.

Of course, it’s easy to figure out the market price of a company. All you need to do is multiply the share price by the fully diluted shares outstanding then add in the balance of outstanding debt and pref and adjust for non-controlling interest and cash. The difficult part is generating that independent opinion of value. Doing so requires months of effort and intensive diligence. This is a high-level view of the responsibilities held by corporate-level REPE M&A investors, with most time spent developing the independent opinion of value.

What type of positions do most real estate private equity corporate M&A investment funds take?

Most real estate private equity M&A funds pursue long-only, controlling positions. This means that they only buy stocks. They do not short stocks. And when they buy stocks, they buy a controlling majority, usually all of them. That’s why buyouts are also called take-privates.

REPE funds prefer to own and control companies because their strategy usually follows three steps: buy it, fix it, then sell it. First, an REPE fund buys a publicly traded company that is either underperforming, underappreciated by the public markets, or both. Second, the fund then fixes what’s broken, waits for sector fundamentals to improve, or both. Finally, the fund sells the company once the issue that originally hampered value has been resolved. Shorting a company is naturally more hands off, since the fund doesn’t control management. Without control, shorting does not fit well into the REPE playbook.

Which metric most succinctly indicates whether a publicly traded company is a good relative value investment?

The discount to NAV most succinctly indicates whether a publicly traded company is a good relative value investment. If a company trades at a significant discount to NAV, you should buy that company. Of course, the devil is in the details. A third-party view on NAV must be thoroughly vetted. But once you’ve done the legwork, and the opinion represents the result of your own thorough analysis, a discount to NAV tells you if an investment is a good relative value investment. In lay terms, if you think the buildings and other sundry assets inside a company are worth more than its outstanding debt and price to purchase every stock at a takeout premium, you should buy that company.

Leveraged Breakdowns Teaches The Essentials

Leveraged breakdowns teaches the essential real estate private equity skills you need to excel in an interview. We act as your real estate private equity guide, diving into the gritty details of this exclusive industry. We hope you try our flagship course, Breaking Down REPE, which takes you through an asset model from complete scratch.

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