Performance data from Preqin’s Real Estate Online service for over 1,350 closed-end private real estate funds displays a negative relationship between fund size and net multiple. Vehicles that reached a final close for less than $250mn produced a median net multiple of 1.4X, compared to 1.3X for all other fund sizes. Similarly, the upper quartile boundary for the smallest funds is 1.7X, compared with 1.5X for fund sizes between $250mn and $1bn, and 1.4X for the largest funds. Although the larger funds generally come equipped with the internal resource, networks and established track record that are attractive characteristics to investors, there is evidence to suggest that smaller funds could provide better relative performance.
In many cases the larger, more established fund managers follow investment strategies that stick closely to the market and go on to produce consistent returns, which could explain the relatively lower net multiples. Smaller funds, by nature, are riskier investments, although they tend to be more nimble than larger vehicles, or target more niche areas of the investment landscape.
Although past performance is no indication of future returns, there is a suggestion that smaller, riskier assets have the potential to generate higher returns; however, these may not perform as consistently as larger, more established funds. It will be crucial for investors to ensure that prospective funds match up with the risk profile of their portfolios in order to achieve the desired results from their real estate allocation.