Why are there few REPE building out RE platforms?

As stated in the title, building out operating RE platforms seems to be a lucrative strategy that allows REPE to unlock value beyond the underlying assets and achieve higher return.. however, there are only a few players adopting such strategy (namely BX, TPG, Brookfield, and Oaktree). Does anyone know why is that the case? Thanks!

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Comments (16)

Jun 3, 2021 - 7:57pm

It's gotta be really big to unlock actual value.  Until you're talking about a billion dollars, the value of an operating platform is usually pretty pathetic.  You're probably not gonna unlock more value than you would by working with an operator who's owned/capitalized separately.  

Jun 3, 2021 - 7:59pm

As a side note, there is a GREAT operating platform called Katerra that is changing the way development works.  Backed by SoftBank, highly revolutionary, massive valuation and they're running circles around the industry operators who have yet to unlock this kinda value. 

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Jun 3, 2021 - 9:21pm

PE platforms and operating platforms are not the same business. Yes, they both invest in real estate, but they are different businesses. If you look at an operator, it's generally a small firm - cash flows, while they have the potential to be huge, are promote and fee driven - meaning they are extremely lumpy and you can't support a large staff. PE firms use the fund structure, which has extremely consistent cash flows and is very driven by AUM in dollar value. 

Seeing above you may mean operating platforms like invitation homes. For all intensive purposes, it's a 'fund'. Yes, invitation homes is public, but they have a cost of capital and are trying to scale a business around 1 product type and achieve returns above their hurdle rate (cost of capital). Building a company like Invitation Homes, etc., is a very different business than the traditional fund model. To get the same results, and you are seeing it in the SFR space right now, funds will just do a programmatic joint venture with players in the space already. If I had to guess, it's significantly cheaper (and easier) to fund a firm with the operating capacity than build from scratch. Going back to what I said above about the fund model - think of it from AUM. The fund can announce or raise around this programmatic JV, and than get more money in the door and more fees (and because it's a programmatic JV, the operator does the work, which means you need less resources and it's more profitable). PE funds aren't (usually) in the business of building businesses - they buy existing business and grow them. In the case of real estate PE funds, they provide (growth) capital to operators to buy more deals. On top of this, if you are saying invitation homes, etc., is an operating platform, so are all the reits focused on one asset type. It's a different business and vehicle for raising and deploying capital with a much longer time horizon than a fund and a (usually) different cost of capital. 

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Jun 4, 2021 - 10:36am

thanks for the response. you mentioned that an operating platform often yields the same result as a JV in the same space, but what are the reasons that some funds (TPG, Centerbridge) focus solely on building out operating platforms? 

Jun 4, 2021 - 11:16am

first of all i don't think that that's true, i see TPG Real Estate pursuing assets.  

second of all, without reading all this stuff above, the question becomes:  if Invitation Homes truly adds value as an operator, watch what happens if somebody acquires them.  oftentimes that buyer is going to look at the portfolio of ASSETS and very little else.  sad but true.

Jun 4, 2021 - 11:41am

I think one reason you see some often big groups focus more on platforms is it can be a more efficient way to build scale. Basically a programmatic structure where it's easy to just roll new deals into the fold with the same team. Cheaper and less of a headache.

To prospie's point, most of the value is at the propco not the opco level. Some assets could benefit from having a concerted, centralized management team (national tenant relationships, highly specific and niche operations like a data center company) but for the most part, I don't think platforms are necessarily a "whole is greater than the sum of its parts" but rather a convenience. RE assets are generally pretty self-sufficient.

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