I doubt any one here has started a real estate private equity firm, but given my access to some institutional money ($+-200M) I might--MIGHT--be in the process and, to be completely honest, there really aren't any better real estate forums that I'm aware of, so I figured this would be as good of a place as any to discuss.
Kind of an open-ended discussion. What are your experiences in RE private equity? How is the capital raising process? What kind of analyst, associate, MD, etc. comp would I expect to pay? What kind of fee structure has been typical for you? What are the common investment minimums? What are the common sources of funds (i.e. foreign, institution, HNW, etc.)? How are the guys responsible for raising money compensated (or are they typically the funds' founding principals)? Any well known third party investment servicers? Fees? Heck, does a fund require Class A office space or is any crappy office space fine? Open-ended discussion. For me I think my lack of knowledge in the institutional RE PE game is kind of a red flag and would be a major "barrier-to-entry."
My situation is basically this--for the last year I've been raising money for one-off deals. Small deals (like $300,000 to $1,000,000). Getting fees that average, like, 3%. Our plan (I have a business partner) was to do 7-10 deals, build out a really nice website for crowdfunding, take our product to venture capitalists in order to raise multiple 7 figures to build out infrastructure and to heavily market, and create a marketplace that has real institutional value. I've been thinking recently, however, how tough our business model has been. Working with unsophisticated investors (i.e. non-real estate professionals) has been nightmarish. Getting them to commit to a deal (that they rarely understand) and then to follow through has been like pulling teeth. Then servicing the investment feels like almost a waste of time (sick of answering questions from $25,000 investors and sick of acting like a debt collector with the real estate Sponsors when they miss their 5-month project estimate by 4 months--"When are you going to finish? Why is there a delay? You said 45-60 days 30 days ago. Do I seriously tell the investors '45-60 days' again?").
The following is from certified user @picklemonkey"
Real Estate Private Equity Capital Raising
I worked at a firm as they transitioned from syndicating deals on a one-off basis to raising a $100 MM fund. I'll try to touch on a few of the questions your brought up.
The capital raising process can be a total pain in the ass and incredibly time intensive. I would say for every 20 meeting you have with someone who is "interested" in investing you will have one person actually invest in your fund. The minimum investment amount is usually a related to the size of the fund you are looking to raise. $500k minimums on a $500 MM fund doesn't make any sense, but $500k minimum on a $25 MM fund is a lot more reasonable. The guys raising the money are usually the firms principals so they are compensated when they put that money to work, We had a fund raising guy for about 6 months, but he never managed to land any investors so he was let go pretty quickly (he was very expensive).
Seed Investors
One thing that I don't see mentioned very often is the importance of seed investors for a fund. It is WAY easier to raise the last 50% of your fund as opposed to the first 50%. Having a strong investor as an anchor of your fund is a extremely powerful marketing tool to get other investors on board. Be prepared to offer an investor like this some sweetheart terms.
Firm Size
For the size of the fund you are looking at I would say the max headcount you could expect to need is a part time admin, yourself as a principal, and one or two associates. If you could find an accountant that is cheaper than outsourcing that work, then bring someone else on board. Fund administration is 100% something that you should outsource (Cortland can be reasonable). Huge time sink and a total pain in the ass to manage yourself on top of finding deals, closing deals, managing deals, and raising capital.
Office Space
Crappy office space is fine. Just make sure it is presentable. If this is your first fund no one expects you to have floor to ceiling windows with the best views in your city.
Strategy
I agree with @cre_questions that you should focus on the asset classes and strategies that align with your experience. If a career value-add multifamily guy all of a sudden wanted to start an office development fund, a lot of investors would have trouble getting comfortable.
The capital I have experience helping to raise was all either HNM or lower level institutional capital.
These are just my initial thoughts and I'm sure many will disagree with my points here.
I worked at a firm as they transitioned from syndicating deals on a one-off basis to raising a $100 MM fund. I'll try to touch on a few of the questions your brought up.
The capital raising process can be a total pain in the ass and incredibly time intensive. I would say for every 20 meeting you have with someone who is "interested" in investing you will have one person actually invest in your fund. The minimum investment amount is usually a related to the size of the fund you are looking to raise. $500k minimums on a $500 MM fund doesn't make any sense, but $500k minimum on a $25 MM fund is a lot more reasonable. The guys raising the money are usually the firms principals so they are compensated when they put that money to work, We had a fund raising guy for about 6 months, but he never managed to land any investors so he was let go pretty quickly (he was very expensive).
One thing that I don't see mentioned very often is the importance of seed investors for a fund. It is WAY easier to raise the last 50% of your fund as opposed to the first 50%. Having a strong investor as an anchor of your fund is a extremely powerful marketing tool to get other investors on board. Be prepared to offer an investor like this some sweetheart terms.
For the size of the fund you are looking at I would say the max headcount you could expect to need is a part time admin, yourself as a principal, and one or two associates. If you could find an accountant that is cheaper than outsourcing that work, then bring someone else on board. Fund administration is 100% something that you should outsource (Cortland can be reasonable). Huge time sink and a total pain in the ass to manage yourself on top of finding deals, closing deals, managing deals, and raising capital.
Crappy office space is fine. Just make sure it is presentable. If this is your first fund no one expects you to have floor to ceiling windows with the best views in your city.
I agree with cre_questions that you should focus on the asset classes and strategies that align with your experience. If a career value-add multifamily guy all of a sudden wanted to start an office development fund, a lot of investors would have trouble getting comfortable.
The capital I have experience helping to raise was all either HNM or lower level institutional capital.
These are just my initial thoughts and I'm sure many will disagree with my points here.
I had a meeting today with someone about this very thing. Given the challenges people have pointed out of getting investors to just fork over money to an unproven fund, what about start with one or two big deals ($25M+) and get funding for that? People can invest in something real (rather than your fund's unknown future) and can reinvest their returns with you when you double their money for them. Basically, be an LP to a JV - get them to give you the deal and you raise the money for it. Definitely with a development and not an acquisition with the low caps right now. I'm talking to some senior developers about doing this very thing in multifamily right now and a number of successful private equity shops I know of started this way.
Most funds have "seed assets" for their funds to highlight the types of investments they're planning on making. You'd have 2-3 prior to the first close then another 2-3 before the final close of the fund. That is why an anchor investor or so sleeve of HNW investors in the fund can help things get rolling; also helpful to have a larger LOC but those are usually secured and based on your equity commitments.
Timeline looks like this (kinda):