There are a lot of private and institutional investors chasing multifamily right now. But securing this money in the form of an acquisitions or development fund takes more than owning a couple of units. In fact, with the economic meltdown and the legacy loan problem that many commercial real estate owners are facing, equity sources haven’t been eager to hand out the cash.
“Up until a week or two ago, we hadn’t taken on a new client,” said Daniel M. Cashdan, head of investment banking at Holliday Fenoglio Fowler, which serves as a placement agent for institutional investors, on a panel at last week’s ULI Fall Meeting in Washington, D.C. “But we took on two recently.”
Still, to successfully raise a real estate fund, sponsors need to keep some simple rules in mind. Cashdan, along with his fellow panelists Catherine (Cappy) F. Daune, senior vice president of The Davis Cos., and Peter A. Lewis, senior investment officer for Liberty Mutual, outlined their rules for how to raise a fund in the new world.
1. Be Ready to Ramp Up. Despite having been in business for 35 years and making 100 investments, Duane found it challenging when The Davis Cos. started its fund. The fund demanded that the company have a higher level of accounting and quarterly reporting. But that’s not all. “The investor relations piece was a tall task,” Daune said.
2. There’s Competition. A lot of companies built up heir staffs, but their investment period expired, and they’ve seen their fee income drop. Still, they want to keep those people busy. “More firms have to raise money,” Lewis said.
3. Show Fiduciary Responsibility. Just because a company is great at real estate doesn't mean it will be a great custodian of their capital. “In order to get investment returns, we’re putting our faith in the manager,” Lewis said.
4. Have Skin in the Game. When The Davis Cos. started its fund, it put up $15 million out of the $230 million. That helped investors feel comfortable. “Have a spare $15 million for your next fund because money talks,” Cashdan said.
5. Stick with the Plan. If you say your fund is going to invest in core properties, don’t suddenly shift to a value-add strategy (even if that niche heats up). “You’re looking for a solid track record with no style drift,” Lewis said.
6. Do What You Say You’ll Do. Even beyond following strategy, Cashdan says sponsors must be consistent. “Do what you told your investors you would do,” he said.
7. Be Open. Investors may not want to hear bad news about a deal gone bad, but if something has gone awry, it’s better to let them know upfront. “We prefer good news, but we would rather get bad news early [before things get worse],” Lewis says.
8. Demonstrate Staying Power. When Lewis evaluates a sponsor, he wants to know if they can finish the fund. “I don’t want to put $50 million [into a $250 million fund] and not see them get to $250 million,” he says.
9. Have Scale. It often doesn’t make sense for the big, institutional investors to look at funds under a certain amount. Cashdan says he prefers funds in the $250 million to $500 million range and won’t take on anything under $100 million.
10. Be Ready for Scrutiny. Despite a 30-year history, Daune said The Davis Cos. was vetted thoroughly by investors. “We had a track record but not in a fund format,” she said. “The team was highly scrutinized.”