Insight Article

Emerging fund managers: Determine your strategy and target investors

Nov 02, 2021
Business tax Real estate

As the real estate market is poised to welcome new investors, RSM has put together a guide for emerging fund managers.  Learn more about the steps, strategies, structures, and compliance to consider when launching a new fund in our emerging real estate fund series.

Key takeaways

  • It’s important to have a clear strategy, but real estate funds also need to be flexible. 
  • Keep investors up to date on any major strategy changes. 
  • A fund’s size, sector, and geographic markets all have an impact on targeted investors. 
  • Tax perspectives should be considered when targeting investor groups.

Determine your strategy, but be prepared to pivot

Scott Helberg, a senior real estate analyst for RSM, says that when a real estate fund starts, it will put together a private placement memorandum (PPM) to outline its strategy. While that is an important first step, funds must remain flexible; fund managers need to constantly review their skill sets and strengths, as well as what’s happening in the market.

“It's important to always reevaluate your strategy to make sure it's still aligned with your long-term company mission,” Helberg says.

While the PPM has historically been important for disclosing information to investors and the general public, there is a stronger emphasis on it today due to heightened due diligence by investors. If a fund’s strategy does end up significantly deviating from it, fund managers need to connect with investors to ensure continued transparency, Helberg says.

Funds generally define their strategy based on the skill sets of their sponsors, says Tom Green, national real estate assurance leader for RSM US, adding that once that strategy is defined, managers will then consider other areas of focus, such as level of risk, investor mix, and geography.

Targeting investors

The types of investors a fund will target hinge on a variety of factors: asset classes, target markets, sectors represented, holding period, risk level, and investment size, Green says.

“Depending on the size of the commitments that you're looking for, you may need to go to larger institutional, sophisticated investors,” he says. “Those investors often require a lot of complexity in terms of structuring, which is something to keep in mind.”

From a tax perspective, consider three groups: taxable investors, including retail investors, high net worth individuals, and family offices; tax-exempt investors, such as pension funds, universities, and foundations; and foreign investors, such as sovereign wealth funds whose capital flows from outside of the country.

“There are (distinct) tax considerations that each group cares about when it comes to their real estate investment,” Helberg says, noting that “those considerations need to be factored in when making a choice of which group to target.”

This article was originally published in partnership with Bisnow.

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