Develop your real estate fund strategy with room to pivot

Emerging fund managers need a flexible framework to succeed in today’s environment

Mar 01, 2024

Key takeaways

Create a solid, differentiated strategy and compelling private placement memorandum. 

Keep a pulse on the economy to capitalize on growth opportunities. 

Remain transparent by outlining fees and providing significant updates to investors. 

Real estate Real estate funds

With expected interest rate cuts, potential distress from a tight lending market and compression of values narrowing the gap between buyers and sellers, the real estate market will likely become more attractive for capital deployment.

However, fundraising is expected to remain challenging as investors seek out managers with proven track records and require more due diligence and data transparency. Real estate investors are becoming more selective and demanding long track records to ensure the capital they invest yields promising financial returns. To stay competitive and take advantage of new opportunities, emerging fund managers should step up to the plate and effectively market their investment capabilities and real estate expertise.

Creating a private placement memorandum that investors will remember

As an emerging manager, you must create a compelling private placement memorandum (PPM) that outlines your fund’s strategy, tells a story and highlights the competitive advantage you bring. It is essential to outline all fees and risks associated with your investment fund in the PPM. Investors are looking at advisory and incentive fees because those ultimately affect the final returns paid to the limited partners. 

Right now, investors want increased transparency surrounding all fees—how the incentive fees will be calculated and ultimately paid to the fund manager. It’s imperative to disclose that in your PPM because investors are becoming more detailed in their due diligence.
Scott Helberg, Real Estate Senior Analyst, Partner, RSM US LLP

Think of the PPM as your 30-second elevator pitch. Explain why your fund will succeed in this market, why your background is important and how your experience supports the strategy you’re putting forward. Once you have finalized and prepared your PPM, the next step is to articulate how your fund is promising and distinctive. 

Highlight your strengths

By showcasing their fund structure, emerging fund managers can demonstrate their creativity and unique directional insight. If you know how to execute specific strategies, especially in specific markets that still have growth opportunities and niche sectors (mixed-use industrials, data centers, storage or life sciences), you can stand out. 

Lauren Gerdes, a real estate senior analyst and senior manager for RSM US LLP, says, “Investors are seeking out fund managers with deep knowledge of certain sectors that are still providing opportunistic investment opportunities.”

Leverage top emerging real estate markets 

Market preferences have surprisingly changed in the last few years. Investors focused on large gateway markets such as New York City; Washington, D.C.; and Chicago 15 to 20 years ago. Now they are becoming more flexible and open to looking at second-tier and third-tier emerging markets. As a result, we see more opportunities for growth in Sun Belt cities like Nashville, Tennessee, and Austin, Texas. If you can demonstrate your expertise in a specific sector and market, that is a crucial opportunity for differentiation. 

Reevaluate your strategy

Monitoring and evaluating your strategy is crucial to ensure it aligns with what you’ve presented to your investors. However, to remain relevant and competitive, you need to have the ability to adapt to current opportunities that are coming out of this ever-changing market. Fund managers have created built-in flexibility over the past couple of years, allowing them to use a portion of their dry powder to capitalize on new opportunities and provide attractive returns for their investors. 

“With the tight leverage environment, we’ve seen increased investment in private debt funds, focused on mezzanine loan and preferred equity positions to fill the gap at a higher yield,” Gerdes says.

Listen to the market

When going to the market to raise capital, be open to feedback. Look at your valuation policy and see what’s coming back regarding how your assets are valued. Your policy will be a good indicator to help determine whether valuations are significantly changing. If your team receives unfavorable feedback after pitching to the market, be receptive and flexible to changing certain aspects of the fund to get a different response.

The takeaway

One of the most critical aspects of forming a successful real estate fund is developing the fund’s strategy with a unique value proposition and setting favorable terms to attract investors. Emerging fund managers should be clear on their investment fund strategy and stay true to the company’s long-term vision while remaining flexible to capitalize on timely opportunities. The pre-transaction stage requires due diligence, proper fund formation and a differentiated approach.

RSM contributors