Where, Exactly, Do Real Estate Private Equity Firms Get Their Investment Capital?

As you consider a career in real estate private equity, you may wonder where real estate private equity firms get the money to invest in properties. Most REPE beginners are unfamiliar with the various investor categories in private equity funds. There are six key investor types in the real estate investment space.

Sovereign Wealth Funds

Sovereign wealth funds are government-owned investment funds that benefit the citizens of that country. Countries that run a surplus due to exporting natural resources (think: oil) will often invest those surpluses around the globe to achieve yield, offset currency risk, and diversify earnings outside of their own economy.

Endowments

Many public or charitable organizations will accumulate significant donations that are invested in order to generate recurring revenue that benefits the organization. Universities, religious institutions, hospitals, and local communities frequently have endowments. The board of directors for the endowment set investment policies and use real estate as one slice of their overall investment strategy in addition to stocks, bonds, and other investments.

Pension Funds

Pensions are very much a thing of the past in the private sector, but in the public sector, pensions are still the primary retirement vehicle for most employees. The largest pension funds are associated with states or with federal agencies. Pension funds must invest monthly contributions from the employer to generate income that is used to make payment to both existing and future retirees.

Insurance Companies

Much like pension funds, insurance companies must invest their policyholders’ monthly or annual premiums in order to be able to pay out claims as they arise. Property insurers may seek out real estate investments that are not geographically tied to their insured portfolio as a diversification strategy.

Family Offices

Successful family businesses will sometimes generate significant investment capital, either through recurring profitability or a sale of some or all of the business. Often the investment capital grows to a point that the owner can justify hiring a full time investment manager. Some family offices have a single manager, but some form a separate company with a staff of dozens or more.

High Net Worth Individuals

Wealthy individuals generally invest with real estate private equity firms through an intermediary like a Registered Investment Advisor, or RIA. Many REPE firms will work with a Broker-Dealer to list their funds with a network of RIAs. This is similar to how mutual funds are sold to individual investors, but with REPE funds, the investors must qualify as Accredited Investors (in general, they must have a net worth of at least $1 million excluding their home, or annual income in excess of $300,000). The advantage of working with Accredited Investors is that the regulatory burden is much lighter for the REPE fund, and the minimum investment is much larger (normally $100,000 or more).

Conclusion

Understanding where a REPE fund gets its investment capital is a good way to stand out in a job interview. The types of investors will give a good indication of the size of projects that the firm seeks and the amount of deal flow in a year. Your career in real estate private equity can be shaped by who is investing in your firm!