The real estate private equity guide

This guide provides information that will help you invest wisely into real estate private equity opportunities. Our goal is to present you with facts so you can exercise your good judgment before you make an investment decision.

last updated Wednesday, May 8, 2024
#real estate private equity #Private Equity

John Burson     Subscribe
The real estate private equity guide


Real estate can sometimes be daunting. Add the words private equity, and it can become frightening. But fear not; investing in real estate private equity is more straightforward to grasp than it seems. This guide will help you understand the basics of real estate private equity.

This guide was written to give you the information you need to invest wisely. Our objective is never to sell you on an investment but rather to present you with facts so you can exercise your good judgment.

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What is private equity real estate?

What is private equity?

Private equity refers to all-equity investments that do not trade in public markets. Private equity investors own shares of companies and partnerships, but these shares do not have a daily quotation and cannot be bought and sold on a stock exchange.

Therefore, private equity investment is less liquid and is privately sourced.

What is private equity real estate?

Real estate private equity refers to investment in companies

  • not publicly traded,
  • owning real estate assets, or operating real estate.

Private equity firms or wealthy individuals make these investments through private placement offerings.
Private real estate funds are primary investment vehicles. They are often used to acquire, manage, and develop real estate properties to generate high returns.

Private equity real estate funds typically focus on commercial properties such as office buildings, shopping centers, apartments or multifamily buildings, and hotels. The investments are usually made with the expectation of a long-term hold to maximize value through active management and eventual exit - sale or recapitalization.

Private equity real estate investors own shares of partnerships; shares do not have a daily quotation and cannot be bought and sold on a stock exchange. Therefore, private equity real estate investment has lower liquidity.

What is real estate private equity firm?

A real estate private equity firm is a type of investment firm that specializes in making private equity investments. As a part of the business model, RE private equity firms raise capital from institutional investors, (ultra) / high-net-worth individuals, and other sources and invest in real estate-related investment opportunities. A real estate private equity firm aims to generate high returns for its investors through active management, property improvement or development, and eventual exit - sale or recapitalization.

Real estate private equity firms often outsource many processes to real estate professionals with expertise in

  • brokerage, 
  • property management,
  • construction,
  • and finance,
  • to help identify and execute investment opportunities.

What is the difference between a private REIT, public REIT, and real estate private equity fund?

If you are researching real estate investment opportunities, you have probably come up with the concept of a REIT. This section will help differentiate between REITs and other investment vehicles and between private REITs and public REITs.

We will use five perspectives in our comparison:

  • Tax benefits
  • Investment strategies
  • Liquidity and risks
  • Minimum investments
  • Returns

Tax benefits

Private and public REITs

The most crucial difference between REITs and other real estate equity funds is their tax treatment. REITs avoid corporate taxes for the profits they distribute as dividends (as long as they have been obtained from real estate investments). All REITs are mandated to distribute at least 90% of their taxable income to investors yearly as dividends.

Equity funds

On the other hand, real estate private equity funds pay corporate income taxes on the profits they generate, but they are not mandated to distribute their income yearly.
At the investor level, receiving yearly profits in dividends or later in the investment horizon can also cause enormous differences in taxes paid. For more information, please contact our real estate investment advisors.

Investment strategies

REITs and funds also differ in their investment strategies. Because REITs must distribute dividends yearly, they must concentrate on brownfield investments that are already generating cash. Real estate private equity funds have more leeway in choosing their strategies. For example, they can focus on greenfield investments that do not generate cash flows in the short term but promise higher returns in the long term.

Liquidity and risks

At the liquidity level, REITs and other funds do not differ much. Instead, the most significant difference is between public and private investments. Remember, REITs and additional funds can be publicly traded or privately held.

Public investments are much more liquid and accessible to trade than private investments. They have daily quotations and no mandatory investment horizon. On the other hand, purchasing and selling a private investment is much more challenging. Private investments usually have a lockup period during which investors cannot claim back their funds, and the investment horizon of a private investor has to be long-term.

Considering other risk sources besides liquidity, REITs and different types of funds do differ. As mentioned, REITs invest in brownfield projects that are mainly already developed and generate cash, while funds can also be invested in risky greenfield investments. Of course, the risk is project-dependent, and each case should be judged separately. A REIT may invest in bad-quality, risky but cash-generating properties, while a fund may invest in non-cash-generating but sound projects.

Finally, many people are confused by three related concepts: risk, volatility, and correlation with the stock market. Private investments are said to be less volatile and less correlated with the stock market. This is true only because private investments do not have a daily quotation and are usually valued using investment models like discounted cash flow. On the other hand, the risk is the practical possibility of losing money. Risk can be proxied using volatility, but above all, it must be evaluated on each investment vehicle's fundamental soundness.

Minimum investments

The difference between private and public investments is at the minimum investment level. Public REITs and public real estate funds (like mutual funds or ETFs) can be traded at the share level without minimum investment requirements.

On the other hand, private REITs and investing in real estate private equity do have minimum investment requirements. To begin with, most of these funds can only be offered to 'qualified investors,' a category with different definitions but generally entails a minimum yearly income or minimum net worth. Because private investments require long-term fund commitments, investment managers prefer having fewer investors committing more significant portions of capital to keep everybody on the same page. Private investments usually require knowledgeable investors with investment experience and resources who are willing to commit to them for the long term. 

Returns on investment

But if private equity investments are less liquid, why would anyone choose private equity? There are several reasons:

  • First, private equity investments allow investment managers to control the invested companies' operations more than public investments. Managers of public companies can become too short-term because they concentrate on stock prices alone. Managers of private investments need only to focus on superior long-term value creation.
  • Second, the investment acquisition process is more straightforward for private vehicles. This allows managers to find better deals. In the same vein, private equity managers can reach niche pockets of the market not covered by public equities. Sourcing better deals that the rest of the market ignores is paramount for generating superior long-term returns.
  • Finally, private equity funds and companies have lower disclosure requirements and can only keep sensitive competitive information to their investors. While a public company must inform its strategy and activities to the SEC for everyone to see (including competitors), private vehicles can keep that information to their investors and regulators alone. That information can be precious, primarily if the company or vehicle specializes in an investment niche.

For these reasons, private equity investment vehicles are expected to generate superior returns to their publicly traded counterparts.

Why private equity real estate?

Private equity real estate can offer several benefits to investors. Here are a few reasons why someone might choose to invest in private equity real estate:

  1. Potential for high returns.
    Private equity real estate investments can offer higher returns than traditional public market investments.
  2. Diversification.
    Real estate values are not always closely correlated with stock market values, which can help reduce overall portfolio risk.
  3. Income generation.
    Private equity real estate investments can provide investors with steady income through rental income.
  4. Control.
    Private equity real estate investments can give investors more control over the investment than public market investments, as investors can directly oversee the management and operations of the properties.
  5. Inflation hedge.
    Real estate investments can provide an inflation hedge, as property values and rental income may increase along with inflation.

How to invest in real estate private equity?

The individual investor can invest directly into private real estate by purchasing and managing his real estate investments (for example, buying a property for rent income). However, this method is unadvised because it requires the time and experience the investor may lack.

The simplest and most widely used method to invest in real estate private equity is through funds and advisors. Advisors like PaperFree specialize in sourcing deals, networking with sponsors, and studying the real estate market. They can then combine that information with the requirements and characteristics of the investor to offer him the investment opportunities that best fit his goals.

Investing through funds and advisors also provides the investor with more diversification opportunities. While the private equity investor might be able to source a single deal in isolation, he can participate in several deals through a fund.

Advisors, fund managers, and sponsors charge fees for all the work needed to source deals, research the markets, and manage and service the investments. These fees vary significantly depending on the specific fund and investment conditions. 

Types of real estate private equity investors

Generally, only qualified investors participate in real estate private equity. The reason is that private equity investment has some requirements that not all investors can pass, like long-term horizons, investment acumen, and minimum investments.

One group of private equity investors is institutions like pension funds, wealth funds, family offices, and asset managers. These companies manage significant sums and have experience judging investments.

Another important group is high net-worth individuals (HNWI) and ultra-high-net-worth individuals (UHNWI). Generally, these are accomplished adults with direct business or investment experience who prefer to do their due diligence.

Both groups resort to private equity investment for better long-term risk-adjusted returns and diversification.

Top real estate private equity firms

Real estate private equity started to become more ubiquitous during the past three decades after private funds were able to generate superior risk-adjusted returns in the long term. That attracted significant institutional and HNWI attention and capital. Some of the most famous investment names of the present, like Blackrock and Oaktree, have substantial private equity operations.

Here are some of the top real estate private equity firms:

  • Blackstone
  • Brookfield Asset Management
  • TPG Real Estate
  • The Carlyle Group
  • KKR Real Estate Finance Trust
  • Starwood Capital Group
  • Lone Star Funds
  • Oaktree Capital Management
  • Prologis
  • Cerberus Capital Management.

How do private equity real estate companies make money?

Private equity real estate companies make money by acquiring, improving, and operating real estate properties.

Who is making money?

A few parties are making money in PE real estate transactions.

  • General Partner(GP), fund management team.
  • Limited Partner (LP), fund passive investors.
  • Financing partners, banks, and other loan financing firms.

Compensation structure

There is the most common compensation structure in PE investments:

  1. Limited partners receive a fixed preferred return on investment plus part of the return above the preferred return's benchmark.
  2. General partners receive several fees plus part of the return above the preferred return.
  3. Financing partners receive several fees plus a fixed return on financing.

Learn other PE real estate income sources in Justin's video.

  1. Acquisition Fees
  2. Asset management
  3. Construction management fees
  4. Disposition fees
  5. Promoted interest

Private equity investment strategies

Private Equity Real Estate Firms run three main strategies: Opportunistic, Value Add, and Core, each with a different income and growth potential.

  1. Value add strategy.
    PE real estate companies use their expertise, financial resources, and networks to add value to their assets. The strategy playbook is the following: purchase property at a discount from market value, improve operations, make physical upgrades, or re-position to a different market segment. After stabilization, sell or recapitalize the property for a higher value.

    value add real estate investment opportunities

  2. Core strategy.
    PE real estate companies purchase stable properties to earn income from their properties through rent or other passive income streams.

    core real estate investment opportunities

  3. Opportunistic strategy.
    Investing in real estate through an opportunistic strategy is the riskiest approach. It involves investing in complex projects with three or more years of lock-in. This strategy necessitates a management team with years of experience. Ground-up developments, acquiring empty buildings, land development, and repositioning buildings from one use to another are examples of opportunistic investments.

    opportunistic investment opportunities

How can we help you?

At Paperfree, we specialize in alternative investments. Learn more about our investment opportunities: 

We believe that alternative investments are critical building blocks of an intelligent investment portfolio. However, navigating alternative investments to evaluate the risks and identify high-return potential opportunities accurately is challenging and requires in-depth understanding.

We aim to provide you with the best real estate investment opportunities and the information you need to understand and judge them on their merits.

We will be pleased to answer your inquiries, provide additional materials, and help you explore the real estate private equity investment universe.

Learn about our real estate investment strategies.

Learn more about real estate investment strategies

Discuss your investment objectives with our real estate investment advisors

Our real estate investment advisors are licensed professionals who will help you discover investment opportunities in the real estate space. They are perfectly qualified to answer all your inquiries regarding investment characteristics, performance, suitability, estate planning, and tax implications.


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