Funds of funds as an opportunity for investors
A real estate fund of funds may be a worthwhile investment option for investors seeking diversification from their home bias – or simply an alternative or complementary investment possibility to further investments.
In conventional real estate investments, capital is invested in assets in local markets or cross-border structures through funds or individual mandates. A fund of funds operates at the next level, investing in multiple funds or investment structures, often in different markets, real estate sectors and risk categories. This approach reinforces the principle of excellence, meaning that investments are made only in the best funds or in partners active in the market with the best products.
Due to its diverse structure, a fund of funds is well suited as an extension to an existing portfolio or strategy. This is particularly true for investors who don’t have a separate team for international investments or who are looking for a way into global investment. Investors who want to try out markets and products beyond their accustomed investment preferences – or are hunting for hidden treasures outside the premium locations – can turn to funds of funds. Terms and investment volumes vary according to the supply and provider.
The right provider is critical
With a fund of funds, you invest in a pool of products and strategies, which typically ranges between 10-15 different local operating partners. Excellent contacts and thorough due diligence is therefore indispensable in seeking out the best-in-class operating partners or funds. It takes deep roots in the market to identify overlooked opportunities – either specific assets or trends within the different real estate sectors. Only a network of excellent local partners can ensure that investments are channelled to first-rate assets and an appropriate return is generated – which is often in the 10-14% IRR range.
When it comes to selecting partners and funds, the bar is high. Key criteria include a focused strategy and an attractive, realistic business model supported by a convincing track record. The team should be well established in the local market and all participants should follow agreed processes. To ensure alignment between the investors and the local operating partners, it is a requirement for the most important participating team members at the local operating partner level that they co-invest some of their own capital.
A PATRIZIA Multi Managers development project: a Whole Foods Market subsidiary in Miami, USA
While additional fees may apply with a fund of funds solution, it is worth remembering: providers of this form of investment solution are specialists at creating the best possible conditions for their clients. A successful fund of funds negotiates the terms and conditions and exploits scale efficiencies by aggregating a larger pool of investors’ capital. Ideally, a funds of funds delivers better returns by selecting the best local partners to work with and at a lower over-all cost as they can exploit scale efficiencies and save costs for the individual investors.
“Funds of funds are an alternative solution for clients who want a diversified global or regional exposure with winning strategies. Our speciality has been in the value-add spectrum of returns, where we find local high-performers in the so-called small- and mid-cap segment.”
Mads Rude, Managing Director of PATRIZIA Multi Managers
Advantages of a fund of funds: the low risk level
A further benefit is that funds of funds can be an excellent risk diversification instrument, which stems from their broad product structure and the relative freedom from market cycles that comes with it. “Funds of funds are an alternative solution for clients who want a diversified global or regional exposure with winning strategies. Our speciality has been in the value-add spectrum of returns, where we find local high-performers in the so-called small- and mid-cap segment” explains Mads Rude, Managing Director of PATRIZIA Multi Managers.
The risks that are associated with a single large investment in an unknown market are minimised by diversification across multiple investments. A fund of funds typically provides diversification across more than a 100 assets for the same amount that it sometimes takes to invest in a single investment. Investors who prefer core or core-plus risk, for example, can use this business model as a ‘test flight’ for investing in products of other risk classes.
Partner in the small-cap and mid-cap segment
Every fund of funds provider develops a uniquely tailored business model to be able to offer its clients access to special, unusual and undiscovered assets and funds. PATRIZIA Immobilien AG recently launched a new fund of funds investment opportunity. The acquisition of Sparinvest Property Investors (SPI), one of the world’s leading real estate investment managers, creates new possibilities for institutional investors in the small- and mid-cap segment. This separate team – now renamed to PATRIZIA Multi Managers - is currently raising capital for their fifth fund of funds, PMM Global V, which aims at raising around 700 million euros. The first close has already taken place with great support from their existing client base.