Mistakes Emerging Managers Make With Commingled Funds

With just 12 percent of all capital raised in funds going to emerging managers in 2015—the lowest proportion since 2007—real estate operators should consider structures beyond the commingled blind pool when raising LP capital.

Real estate operators eyeing the institutional investment management world often assume they have a black and white decision to make: raise a commingled fund or bow out, with no gray area in between. That thinking can be a mistake, according to the multimanager group Belay Investment Group.

Eliza Bailey says operators looking to break through into the real estate investment management business should consider all structuring options, and not just focus on the traditional commingled blind pool.

“Many believe that in order to enter the market they have to ‘go big or go home’ and get a commingled fund to attract institutional investor interest when, in reality, this model has become less and less popular for many institutional investors,” she says.

With just 12 percent of all capital raised for commingled funds in the year up to October 2015 going to emerging managers—the lowest proportion since 2007 and down from a peak of 32 percent in 2011, according to data provider Preqin—fundraising for first- and second-time fund managers continues to be daunting.

Instead, Bailey recommends operators consider partnering with larger, more experienced allocators, which can also ease the burden of building back office and reporting functions from scratch—an important issue when raising LP capital that’s regularly overlooked by emerging managers, Bailey and Larissa Herzceg, managing partner and CIO of multimanager Oak Street Real Estate Capital, say in an interview with PrivcapRE released this week.

Programmatic joint ventures are also another route to help kick-start institutional relationships on a deal-by-deal basis, although—as Herczeg concedes—in a competitive U.S. market “having discretion over capital is a competitive advantage when sourcing deals.

“Operators need to think long and hard about their specific skill sets, their business goals and objectives and evaluate the best structure for their firms,” says Herczeg. “Once again, there isn’t a right answer.”