Historically, individuals—more colloquially referred to as “friends and family” or the “country club” investor—have always been the on-ramp investor profile for many property developers-operators. These investors were generally relegated to the smaller investments presented to them by people they knew in the real estate business, or real estate investment trusts available in the public markets. All the while, larger deals and fund vehicles remained the purview of the larger institutions. As the real estate investment class has grown in prominence over the last few years, so too has the prominence and power of the individual investor.
From Crowd to Class
Over the last few years, the advent of crowdfunding allowed individuals to access smaller debt and equity investments that didn’t necessarily involve a sponsor with whom that investor had a pre-existing relationship. Conversely, it allowed sponsors to raise the necessary capital from unaccredited investors and in very small increments. This was an early indication that a critical mass of individuals could take down a big-ticket asset such as real estate. Notably, many of the first movers in the crowdfunding space, such as Realty Mogul, Fundrise and Patch of Land, have parlayed their database of investors into raising homegrown fund vehicles that they manage today.
From Families to Offices
Over the same period, wealthy individuals and families have begun to organize into single and multifamily offices. Rather than make investments in a haphazard and reactive manner, they now leverage and allocate their wealth into real estate investments much more strategically, programmatically and proactively. They have brought on institutional-caliber staff and investment advisers to do so. As an investment manager, we have witnessed this evolution up close, as this profile has charged us with investment mandates defined by strategy rather than by deal (“Find me multifamily value-add investments” vs. “What do you think of this multifamily deal I was just sent?”). They can compete with institutional private equity funds to make such real estate investments. Sponsors have begun to take note.
From Institutions to Individuals
Blackstone recently announced that 15 to 20 percent of its assets under management have been raised from individual investors. This comes from a directed push that it began roughly five years ago, where the firm has been creating products and vehicles that could be sold through the broker dealer and registered investment adviser channels. They have cultivated an army of sales and marketing people to do so. Other large institutions like BlackRock, Starwood Capital Group and Brookfield have been similarly creating products and staffing up to do the same—either organically or via acquisition of advisers that manage individual investor capital.
But it is not only the larger marquee name institutions that are doing so. As an investment bank and adviser, we are regularly presented with asset- and strategy-specific real estate fund or REIT offerings that are geared towards individual investors. We are also doing more fund formation and private placement work with emerging real estate developer-operators seeking to organize their platform beyond the “one-off” syndication model by which they built their business. While the larger institutions require scale, the diversity of the individual investors makes room for small and midsize vehicles with niche strategies that don’t necessarily need to fit into the standardized five-year hold typically presented.
As capital has flooded the real estate market, it has become increasingly difficult for real estate funds to invest into real estate deals using the traditional three- to seven-year closed-end fund structure. Many sponsors also recall how quickly the larger institutions turned off the capital spigot in the last market downturn. While at the same time, individual investors and their financial advisers are seeking to recalibrate a portion of their investment portfolios away from public equities and bonds into alternatives, particularly real estate.
The individual investor class tends to be “stickier” with a long-term and, in certain instances, evergreen investment horizon. This provides for a level of patience and stability into a fixed asset like real estate. It is reminiscent of Warren Buffet’s comment, “Only buy something that you’d be perfectly happy to hold if the market shuts down for 10 years.”
David Blatt is the chief executive officer of CapStack Partners. Connect with him on LinkedIn or on Twitter @capstackceo.