In our second extract from the Preqin Special Report: Real Estate Co-Investment Outlook – March 2016, we examine the results of Preqin’s survey of more than 100 real estate investors, discussing the perceived benefits of co-investment, investors’ views on performance, fee structures and allocations.
Of more than 100 investors surveyed by Preqin in H2 2015, one-third had some interest in co-investments, perhaps illustrating the barriers to entry to some institutional investors that lack the internal resources to manage capital invested in these structures.
For those that do make co-investments, the key motivation is gaining more exposure to attractive assets, which was mentioned by 44% of respondents. A large proportion (42%) of surveyed investors also stated better returns as a perceived benefit of co-investing, as well as the opportunity for lower fees than in the traditional commingled fund model.
In terms of performance, 40% of those real estate investors surveyed have seen their co-investments outperform their private real estate fund returns, including a fifth that have significantly better returns. While the majority of investors have seen better returns, one in 10 investors has seen their fund investments outperform their co-investments.
The results of our survey indicate that co-investments typically have lower fees than those seen in the usual fund arrangements. The majority (58%) of fund managers offer co-investment opportunities with a reduced management fee, with an additional 19% offering no management fee. A similar trend is seen for carried interest rates too: a quarter of firms charge no carry, whereas 44% offer a discounted carry structure to the standard fund commitment. More often than not, LPs are seeing reduced and more favourable fee arrangements on their co-investment commitments when compared to their fund commitments.
Co-investments remain a tiny proportion of most investors’ portfolios however, with 62% having less than 2% of their real estate portfolio allocated to co-investments. There are some investors that commit much more capital to co-investments, with 13% allocating more than 10% of their real estate portfolios to such opportunities, including 3% allocating more than 20%.