Institutional Investors - who are they, how do they fit in the overall picture of the players and NCREIF as a performance hurdle
Hey guys,
Was reading a HBS case from 2009 on institutional investors and came across these groups using NCREIF (NPI) as an index for performance hurdles on a deal. Seems this group has hundreds of billions in real estate and is used as a reference for returns. I'm confused what these institutional groups may be? Are these mostly public companies with a large base of investors that can invest in both public equity/debt and private equity/debt? An example they gave is pensions funds, but can anyone clarify?
So we have a real life example that I chose, are these institutional investors say the New York State Teacher's Pension Fund investing in private equity groups like RXR in NYC and RXR then uses their money to invest in whatever thesis they agreed upon with certain returns? Or another example, is this the money behind groups like William Macklowe Company, a private developer that said they raised have raised a fund of $1 billion looking for opportunistic deals to invest in? If these examples are wrong, what need's to be fixed to make it correct?
Are the institutional investors removed from the actual investing at the property level and more behind the scenes getting a return as a silent partner? Are these guys considered LP's (limited partner's) in the two cases above? Lastly, how do these guys apply to private groups who may seek outside capital from HNW and UHNW individuals - in this case are they not institutional and just private investors investing in x private shop and not apart of this topic?
Some questions may seem obvious, but trying to piece together players in real estate more clearly.
... for the love of god, just google institutional buyer.
Why are you on WSO? This is not the new wsb.
Lot's of posts talk about the details of this industry (mainly from the... "who should I work for" frame). Here is "ranking" and thus list of institutional real estate investment managers (i.e. the type of firms that report data to the NCREIF indices such as the NPI and ODCE) https://irei.com/wp-content/uploads/2019/08/2019_PFR_IREI-REPORT-US.pdf
In a nut shell:
Institutional real estate investment managers - firms like PGIM, Clarion, AEW, Invesco, USAA, Nuveen, LaSalle, CBRE GI, Hines, Blackstone, etc. (aka the "GPs")
Institutional investors - CalSTERS, CalPERS, Texas Teachers, GIC, Harvard Endowment, Gates Foundation, LifeCos, etc. (aka the "LPs")
LPs give money to GPs (in funds or via separately managed accounts), the GPs go buy stuff (sometimes via JV deal with "operators" i.e. owner/developers like RXR, Silverstein, etc. or just buy direct).
Great thank you I'll read through the report. So for example where is the $1 billion fund a developer raised to go after opportunistic deals? Seems very risky so do LP's have a small bucket that target very risky returns and can invest straight with an operator? Also guessing the dev shop isn't in 20 separate JV agreements with LifeCos to raise money to go out for a few projects so is it more straight up cash for x return type deal?
To answer:
1. When you are talking about "developers" with billion dollar funds, you are talking about vertically integrated real estate businesses at that point (like Related or Hines for example). They essentially have real estate investment management business lines within their overall structure. In fact, many "operator/developers" can and will make direct relationships with the source capital and mitigate the need for dealing with the intermediary firms/funds.
2. The institutional investors (i.e the "LPs") set allocations first to "real estate" then to various strategies (core, value-add, opportunistic, public, etc) and/or property types (office, apt, alternatives, etc.). So they can decide their risk profile individually, and place bets as they like to increase total yield/return from the real estate allocation (think general portfolio mngt techniques employed). Thus, most diversify with many managers and funds and thus strategies/asset types.
3. Actually a a dev shop could do "20 separate JVs" on 20 separate deals. Deal by deal is not uncommon as each can have such a different risk/return profile and/or require vastly different amounts of capital. Most shops would prefer to establish a "programmatic relationship" where the terms of the JV structure are largely the same deal to deal and the same LP keeps funding sequentially as deals are found. If you raise all or a lot of money "up front" but cannot deploy it in a timely manner, then the fund will suffer "IRR drag" and returns fall (and value of promotes go to zero fast). Thus, raising money as needed is actually cheaper (and somewhat easier) and less risky. But does require more effort.
Spot on with 1!
It's kind of how JPM or MS or Lazard aren't just investment banks but rather diversified financial institutions with various business lines. JPM is a commercial bank, an investment bank, an asset management firm, a wealth management firm, an institutional securities broker-dealer and many more things all in one house.
Similarly Related or RXR aren't "just developers" but rather a combination of developer, real estate investment management firm and owner/operator. Hell, they even have in-house property / facilities management teams instead of outsourcing to some firm. These are diversified businesses with multiple business lines within the real estate universe.
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