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Economies of Scale Enjoyed by the Larger Private Equity Real Estate Firms

by Sam Meakin

  • 27 Nov 2009
  • RE

The number of staff employed by a private equity real estate firm varies significantly with assets under management. Firms with less than $250 million in assets under management employ an average of 10 staff, while firms with $10 billion or more in total assets employ an average of 154 people. There are significant economies of scale to be enjoyed by the larger private equity real estate firms, and such firms typically have fewer staff per $1 billion in assets under management than their smaller counterparts. Firms with less than $250 in assets under management employ, on average, the equivalent of 159 members of staff per $1 billion in assets, i.e. $6.3 million managed per employee. For firms with $10 billion or more in total assets, this falls to just 13 employees per $1 billion, or one employee for every $76.9 million managed.

Since the management fees that private equity real estate firms collect are almost universally calculated as a percentage of the total investor commitments to a firm’s funds, one would expect that the percentage rates charged by firms managing the largest funds would be less than those charged by firms managing smaller funds. This is generally the case, but only marginally so, and the slightly lower fees only partially reflect the economies of scale that the larger firms benefit from. As a result, the operating economics of the largest funds are very favourable and the management fees earned by these vehicles have become a significant source of profit for their managers.

The 2010 Preqin Private Equity Real Estate Compensation and Employment Review is a vital source of reliable and accurate information on the latest trends in private equity real estate compensation and employment. Please click here for more information.

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