Pricing a new fund?
I’ve been preparing for the job hunt and this scenario popped into my head so would appreciate feedback on my thought process and a more seasoned professional's take on it.
Let’s say a fund has two prime multifamily development projects, one is almost completed and the other one is at the later stages of planning/permitting. They’re now looking to recap by finding equity partners to buy a % share of the fund with the intention to grow it further through additional developments and then hold the assets for cashflow.
My question is how do investment managers go about pricing at this stage of the fund? You have 2 projects well underway to seed the fund and looking for equity to recap. Are you going out to potential investors targeting an IRR return over an investment horizon and based on this return you’re effectively working out what the required investment is? Would you then add a premium on top of that to price in the de-risking of the two current projects?
Bonus question – Given today’s current uncertainty in the economy and with very tight spreads between cap rates and 10-yr treasury. What factors would you raise to potential investors that are concerned over softening cap rates?
My first thoughts are that inflation is slowing, the feds are pausing rate hikes and monitoring how the economy will shake out. The labour market is resilient but the signs are pointing towards interest rates remaining flat or being cut rather than more increases (better idea after more data over the next quarter).
Is there an argument to say that risk premium on prime multifamily has reduced over the last decade, seeing the large shift of institutional capital to that asset class globally and that there is a general view that multifamily is a much safer asset? Therefore, prime MF cap rates are not as closely correlated to increases in interest rates?
Another point could be around whatever positive fundamentals are present in the market to suggest strong future growth e.g. population/immigration
Thanks!
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