How it works: While there are thousands of real estate fund managers whom advisers can work with, “it takes time and a dedicated effort to find managers whose strategies are most suitable to meet clients’ needs and goals,” Derek Newcomer says. “The adviser needs to ensure that a client [is qualified and willing] to invest in an illiquid investment strategy such as private real estate.
“Some managers have very high minimums,” Newcomer explains.”we have been successful in negotiating minimum investment sizes for our clients so that we can obtain greater adoption from a wider universe of clients.”
Newcomer’s firm, Beacon Pointe Advisors, places clients in partnerships with such firms as Kairos Investment Management, Southwest Value Partners and Buchanan Street Partners, which invest in a wide variety of properties, including office buildings, multifamily properties, industrial properties and retail assets.
An internal committee at Beacon Pointe determines a client’s appropriate asset allocation, usually no more than 10%, before investing in a partnership, Newcomer says.
Investment managers typically charge a 1% to 2% management fee on either committed or invested dollars, as well a performance fee of 15% to 20% after investors have received their original dollars invested and an 8% to 9% preferred return.
“Some funds are structured differently,” Newcomer says, “so it is extremely important to understand how fees are generated and what the fund pays out to the manager as fee income.”
Upside: Distribution of income: Beacon Pointe targets approximate total return combining income and profit to around 12% to 15% over the life of the fund.
Risks: Investments could be illiquid for up to 12 years.
“Fractured management teams can lead to trouble, particularly when you are in a long-duration life fund that can last 10-plus years,” Newcomer says.
“Poorly managed assets can lead to increasing costs and decreasing incomegenerating capabilities.”
The manager may also utilize too much debt when acquiring a property, become too reliant on one tenant or concentrate holdings in one geographic region. What’s more, a partnership may collapse as a result of fraud, disagreements within management or other reasons.
“Advisers should thoroughly review the fund offering documents to fully understand what the consequences of such an incident would have on underlying investors,” Newcomer says. “Certain clauses within the offering documents will outline what would happen should such an event take place.
“There may be arbitration clauses, mediation, or assets may be placed into a liquidating trust,” he says. “Investing with the right management team that has a long history of working together successfully can help to minimize such an event.“
Charles Paikert is a senior editor of Financial Planning. Follow him on Twitter at @paikert.
It is extremely important to understand how fees are generated in private partnerships, says Beacon Pointe’s Derek Newcomer.