For family offices that want to invest into real estate, a partnership is an option worth considering. A family office real estate partnership is a private investment club that focuses on either U.S. properties or exclusively foreign commercial real estate. These clubs are designed for family offices that see real estate investment as an appealing opportunity but otherwise don’t have the required expertise to navigate these waters. The club is usually uniquely structured as a direct, deal-by-deal club that provides a highly aligned solution for private capital.
The greatest opportunities in real estate are often deals that are off-market or require investors to move quickly and, in some cases, purchase with all cash. By being a part of a co-investment club, family offices are better able to move on these opportunities, all while decreasing the risk through diversification of each family’s contribution.
Who’s In The Club?
Think of it like an outsourced team for a family office to tap into — a kind of multifamily office for real estate investing. A family office can co-invest together in deals identified by a main member, who also typically takes on all the “dirty work” of transaction sourcing and execution while still allowing and empowering the families to make key decisions around each property deal. A real estate co-investment partnership club is typically created to bypass fees, recognizing that family offices often have difficulty in finding direct deals on their own. A group typically consists of 15-18 families.
Know The Risks
One risk is when people talk about real estate as a bond substitute. Of course the dividend stream from property looks a lot like a bond, and in the global quest for yield, it feels good to get a 3%, 4% or 5% income stream from a building with a dollop of inflation protection on top. But buildings are not bonds, and treating them as such can mask some critical risks. They have embedded obsolescence, for one, and are a depreciating capital asset. They are generally leveraged, for another. And let’s also not forget that a lot of families are focused on assets like hotels, care homes and student housing — all of which have significant operating leverage embedded in the real estate and start to serve less and less the function in the portfolio that investors think they do.
Best Practices For Co-Investment
For family offices that remain interested in co-investment partnerships, adhering to some best practices can make for a much smoother start.
It all comes down to deal flow and the number of deals that can be evaluated before moving forward. The first thing to remember is to not blindly take the first co-investment deal that crosses your desk. Think analytically from the top down, develop a framework for investing and then go out there and scour the market for the very best opportunity that fits your framework. Be thoughtfully proactive, not reactive.
Co-investments are very inefficient, complex and time-consuming. It’s not practically possible for most families to build a portfolio of co-investments across an operationally complicated asset class like real estate. To get scale, and indeed if the intention is to replace traditional fund investments, you need to link up with or create platforms. These enable you to do multiple deals and to diversify. Without such a template in place, co-investments could have only a marginal impact and may increase risk in the portfolio rather than decrease it.
There is a big difference between asset managers and risk managers. As family offices morph into the latter with increasing direct investments, the team they need becomes different, perhaps radically so. Hire new talent to pursue this new paradigm — and don’t be surprised when they cost a lot more than your existing team members. Step up and spend some of the savings from not investing in traditional funds to get the best investment talent out there.
The range of alternative collaboration models available is broadening. This moment in time is driving real innovation in the family office space.
Real estate has been one of the greatest generational wealth-building strategies in history. Like it is often said, you make money when you buy, and to buy right it comes down to market analysis, the price you can buy at and the long-term opportunity. Co-investment partnership clubs can help family offices tap into this complicated but fruitful asset.