What does private equity fund investing entail

When it comes to investing in syndications, many people presume that this means investing in a single property, whether it’s a multi-apartment complex, self-storage or a mobile home park, or another type of real estate. While investing in one of these asset classes individually makes sense at the beginning of a real estate investing journey, later on you realize that you should also consider investing in private equity funds, which allows to  immediately diversify your portfolio.

In Wall Street terms simply put, single asset can be compared to a company stock, and private equity fund is compared to mutual fund.

Just like any commercial real estate syndication, a private equity fund requires long-term investment, and does not offer much liquidity. Its main benefit is diversification, which varies depending on the fund’s purpose and setup. For instance, some operators find it easier to set up funds that allow buying and self-managing multiple assets under a single umbrella. 

Other fund managers employ a different fund structure setup, such as Fund of Funds (FoF) which invests in other operators’ projects. In addition to diversification, FoF may offer certain additional benefits. Typically, FoF fund managers select projects where the entry points are significantly higher than what would be offered to retail investors. Therefore FoF allows individuals to participate in higher-profile projects while reaping the reward of the much lower entry point.

Yet another reason a fund manager may pick up an investment that a day-to-day investor wouldn’t if let’s say the fund’s goal is long term growth which doesn’t offer much of immediate cash returns. Well, guess what, by picking up for example a hard money lending opportunity, a fund manager is able to bring the immediate cash on cash return to the fund.

All markets experience volatility from time-to-time, including today’s uncertainty caused by the pandemic and the ban on tenant evictions. But having access to funds that offer diversification as a hedge against such volatility and is definitely a plus. Therefore, a fund manager who invests in multiple asset classes that span across multiple geographic markets  provides a diversified portfolio  as an added safety net bonus.

Although investing in private equity funds carries tangible benefits, investors must also be aware of their drawbacks. For example, investors will not know what are all of the specific projects to be included in the fund, and hence this type of a situation is referred to as a “blind pool”. While this is true, once the fund is fully set up, the fund manager would be able to share with investors details for all invested projects.  Not only that, but the fund manager should also be able to show the results on a per investment basis. This transparency will allow investors to view performance of each individual investment in the fund.

Obviously, fund investors should undertake meticulous research prior to turning over their money to a fund manager. One of the most important research objectives is to vet the fund manager; and optimally to invest with a fund manager with years of proven experience and knowhow in profitable fund operation. In order to accomplish this, for quite some time investors heavily counted on word-of-mouth from their peers for such research. Feedback from trusted sources is no less important today, however such research is now available at your fingertips on countless crowdfunding platforms that offer details for numerous single asset and fund syndications.

Return expectations vary among funds, and based on the fund manager’s expertise and the type of strategy they select. Investors can expect a projection of an expected returns range, but it is virtually impossible to forecast exact numbers.

While some single asset syndications may outperform funds, the lower return projections of a fund are offset by lower risk through various diversification strategies. Such diversification strategies may include investments across multiple asset classes and markets, as well as types of funds.

Fund investing may not necessarily be a solution for every individual, but if you are at a point where you want a diversified portfolio, not interested in spending time on searching for multiple individual investment projects, and crave more safety as well as less risk, then consider looking further into private equity funds.

Have you thought about passively building your wealth via real estate investing?

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