Real estate hedge fund?

Question

Hi everyone,

I am a small investor at this time, but myself along with a small group of other investors were wondering what the viability would be in approaching a real estate hedge fund or private equity firm for large scale financing to secure future deals? I'm just wondering your general thoughts on how one would approach such a fund. I would think you would want to create a knockout executive summary, outline expertise among members and why it is valuable, show current holdings among members and their performance, identify a niche market to target, and show that there are deals out there that would meet a set of criteria comfortable to both the investors that would form their own entity as well as the hedge fund or private equity firm in terms of risk tolerance. Any other factors that should be considered so we are not potentially wasting time on both ends if we were to seriously pursue in the near future?

I am eager to hear your thoughts about the idea and hear from people who maybe have tried to or suceeded in doing this, regulatory or legal hurdles involved, etc.

Dion DePaoli · Answer

Joseph it sounds like you are after a loan or line of credit. In that sense, any lender will work it does not need to be a RE Hedge Fund or RE Equity Firm. In order to be considered a real estate fund, the manager must invest in assets related to real estate. The investors in the fund are passive but the manager of the fund is not. In some cases their subscription documents may preclude them from taking a debt interest in an asset. Investment funds are not banks but from time to time will lend money. This is usually "fund to fund" but certainly capital does get put with entities that are not funds. I think the key here will be that you will likely have to give them some equity though.

Do not think of these institutions as banks, they are investors, just like you and your group. Also remember the cost of capital in funds is pretty high and in some real estate funds that have good returns, their capital will not be cheap to you. In many cases, you will not get too much attention if you plan on offering them a 7.0% interest rate, they are going to want to see and likely need to have higher returns than that.

You might have different results or interest from funds or PE firms that are not real estate based but want real estate exposure in their portfolio. In some instances you and a real estate fund are competitors.

In any event, you will want and need to have what the industry refers to as a "pitch book". A presentation of your firm, usually these are PowerPoint files. Remember when making these that you will not always be given a face to face chance to pitch. When pitch concepts are complex, usually a teaser is used to gain initial interest.

A couple other barriers you must consider include the economy of scale. Can you produce the deal flow so they can get the capital out the door. In that sense, larger investment funds will not be interested in small investment programs. The legal costs to setup a venture with you will not be worth the capital that gets put out. The structure of joining the parties will also have complexity to it, you are joining multiple investors, getting them all to agree may not be easy.

You are on the right path in the sense that, if you want to raise capital you should ask the folks who have the capital but nothing makes a RE Fund different than any other investor, private or institutional. The same things that interest you and your private investors will interest other institutional investors. The same presentation and details matter.

Real estate hedge fund?

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