Private Real Estate Funds Research Articles

Practical Applications of Cash for Calls: A Quantitative Approach to Managing Liquidity for Capital Calls

In <b><i>Cash for Calls: A Quantitative Approach to Managing Liquidity for Capital Calls</i></b>, from the Fall 2022 issue of <b><i>The Journal of Alternative Investments</i></b>, <b>Jerome Schneider</b>, <b>Sean Klein</b>, <b>Wade Sias</b>, and <b>Simon Fan</b>, all of <b>PIMCO</b>, provide an approach to address the difficult task of minimizing cash drag while ensuring that limited partners can meet capital calls for private investments. By analyzing cash flow data for private equity, private debt, and private real estate funds, the authors quantify the extent of cash drag experienced when committed, but uninvested, capital is held in cash. They also illustrate the danger of holding the capital in public market equivalents (PMEs). Using historical call rates, the authors then simulate a tiering approach to holding committed capital in assets that have a range of risk and return characteristics and dynamically adjust the allocation. They show this strategy performs similarly to constant proportion portfolio insurance. The portfolio grows when the market outperforms, due to commitments that are partially allocated to PMEs, while an allocation to safe tiers protects the portfolio in market downturns.

How do Non-Core Allocations Affect the Risk and Returns of Private Real Estate Funds?

How do Non-Core Allocations Affect the Risk and Returns of Private Real Estate Funds?

Private Real Estate Returns, Style Drift, and Procyclical Risk Taking

This paper documents that development exposure is an important determinant of private real estate returns and market risk exposure. It also documents that open-end private real estate funds have time-varying, procyclical market risk exposure through their development activities. As such, these funds are disproportionately exposed to the downside of the market cycle. Lastly, I find that fund flow pressure is the primary driver of time-varying development exposure. Funds buy a higher proportion of safe, liquid assets compared to risky, illiquid assets when they have larger unfulfilled subscriptions. While this increases assets under management quicker, it also hurts existing investors by decreasing their market risk exposure at the time when it is the most desirable and beneficial. Additionally, funds stop developing as redemption requests increase, leading to lower market risk exposure when the market recovers.

Asset allocation decision-making practices of institutional real estate funds in a developing economy

PurposeIn a bid to broaden the understanding of the real estate investment decision-making framework, the purpose of this paper is to examine the real estate asset allocation decision-making practices of real estate funds in Nigeria, a developing economy. This is with a view to providing information toward enhancing real estate investment decisions.Design/methodology/approachA mixed-methods approach comprising a combination of literature review, expert interviews and semi-structured questionnaire survey is adopted for this study. Through literature review and expert interviews, the asset allocation decision-making process of institutional real estate funds was identified. Based on the literature review and expert discussions, a semi-structured questionnaire was developed and self-administered on fund/portfolio managers of 59 institutional real estate funds in Nigeria to investigate their asset allocation decision-making practice. Data were analyzed using descriptive and inferential statistics for the closed-ended questions while the open-ended questions were content analyzed.FindingsThe findings revealed that the asset allocation decision-making process utilized by public and private real estate funds follows an opportunistic asset accumulation approach. The decision-making process also varies depending on the nature of the fund. Further findings showed that government policies, political uncertainties and regulatory mechanism motivate asset allocation decisions. Moreover, majority of the sampled real estate funds employed a combination of in-house personnel and external consultants (hybrid), while mean/standard deviation and cash flow analysis (DCF, NPV) were mostly utilized by the funds in making property investment decisions.Practical implicationsThe findings implied that the real estate asset allocation decision-making process of institutional property investors in Nigeria deviates from the normative model of the asset allocation process prescribed in the literature and varies depending on the nature of the real estate funds. As such, familiarization of institutional investors with government policies, political climate and other regulatory mechanism (barriers to entry) guiding the ownership and operation of real estate assets in the country could improve their real estate investment decisions.Originality/valueThe study complements and extends existing literature on real estate asset allocation decision-making process of institutional investors from the viewpoint of the actors involved in a developing African economy.

The risk and return of private equity real estate funds

This study employs an asset pricing approach to quantify the exposure of private real estate funds to both private and publicly traded real estate risk factors. The analysis includes the creation of specific performance indices and the use of methods seeking to address some of the inherent issues with private real estate fund data, such as the high degree of serial correlation in observed total returns. The use of the Driessen et al. (2012) estimator leads to markedly higher risk factor coefficient estimates than seen in the prior literature and estimated with time series regression.

Stale Prices, Fragility, and Detrimental Cash: Evidence from Private Real Estate Funds

This paper documents a new source of financial fragility and studies its interactions with common stabilization tools. Economists believe funds report stale Net Asset Values (NAVs) when they invest in illiquid assets. This staleness creates return predictability, NAV-timing risks, and fund fragility risks for open-end funds. However, because their assets are illiquid, managers limit fund flows to deter buying assets at a premium or selling them at a discount. Limiting flows has the secondary effect of protecting against the risks stale NAVs create. Interestingly, illiquidity in the underlying assets creates the opportunity for, and the friction against, exploiting buy-and-hold investors.

Performance drivers of private real estate funds

Despite the growth seen in the private real estate fund market, there remains a paucity of academic work on their performance drivers and risk characteristics. This study empirically examines the characteristics and drivers who influence the performance and investment activity of private real estate funds. A detailed sample of US-focused closed-ended Value add and Opportunity funds is used to do this. Both absolute and relative performance measures are used, including the public market equivalent measure. This is more widely used in the private equity studies but to date has been little used in real estate work. The analysis showed that there was generally little statistical significance observed for fund characteristics being drivers of fund performance. Fund size was found to have limited influence upon subsequent performance and sector specialisation was only accretive for outperforming funds. Total vintage year capital flows negatively impacted performance irrespective of measure used. Fund investment activity, as measured by observed cash flows, was found to be pro-cyclical with the results being most significant for distributions.

Performance of private equity real estate funds

Purpose – This paper aims to focus on the performance of private equity real estate funds. Since many institutional investors have special programs to invest with first time managers, or emerging fund managers, it also seeks further evidence on how persistent the performance of real estate funds is and how the growth in fund size affects the realised returns of a fund.Design/methodology/approach – The analyses performed are based on a large global sample of value‐added and opportunistic private real estate funds. Different model specifications are used to study the fund and sponsor‐related factors' correlation with fund performance.Findings – It is shown that the realised performance is positively correlated with fund size but negatively correlated with the sequence number of the fund supporting the fact that emerging managers are likelier to achieve good returns. The data also reveal trends in fund performance and the growth of the fund size. Evidence from private equity buy‐out funds has also shown that...

Suggested Versus Actual Institutional Allocations to Real Estate in Europe

The allocation to real estate by institutional investors has increased in recent years and as a result the gap between suggested and actual allocations has narrowed. The increased inflow of capital to the real estate market is suggested to be a function of two factors: An increased focus on absolute return target investments among institutional investors and an increased target allocation to real estate. This article argues that the increased target allocation is made possible mainly by the development of new investment vehicles, in particular private real estate funds, the growing integration of economic regions, and other factors such as the development of investment benchmarks. The flows needed for the actual allocation by European institutional investors to match the suggested allocation requires that at least 31% of the real estate equity universe be held by owner occupiers. The authors estimate that seven years would be needed to reach the target allocation, but it is unlikely that sufficient investment opportunities will arise unless the willingness of owner-occupiers to outsource their real estate assets increases.

Suggested vs. Actual Institutional Allocation to Real Estate in Europe: A Matter of Size

The allocation to real estate by institutional investors has increased in recent years and as a result the gap between suggested and actual allocations has narrowed. The increased inflow of capital to the real estate market is suggested to be a function of two factors: An increased focus on absolute return target investments amongst institutional investors and an increased target allocation to real estate. We argue that the increased target allocation is made possible mainly by the development of new investment vehicles, in particular of private real estate funds, but also of the growing integration of economic regions and of other factors such as the development of investment benchmarks. The flows needed for the actual allocation by European institutional investors to match the suggested allocation constitute at least 31% of the real estate equity universe held by owner occupiers. We estimate that seven years would be needed to reach the target allocation, but it is unlikely that sufficient investment opportunities will arise unless the willingness of owner occupiers to outsource their real estate assets increases.