Wharton Emeritus Professor Dr. Peter Linneman differentiates the two.
- Real estate syndications are investment vehicles raised to fund investment in one or more already identified commercial real estate properties, whereas real estate private equity funds are a “trust-me” vehicle that require investors to blindly fund investment capital based on their trust in the vision, reputation and track record of the fund sponsor
- It’s much harder to raise money for real estate private equity funds because of their nature as “trust-me” vehicles
- Syndications are more flexible in terms of investment hold period than finite-lived real estate PE funds
Full interview transcript:
Bruce Kirsch: Real estate private equity funds, or PE funds, are a much talked-about part of the business, but they’re a relatively recent entrant on to the scene, having started just in the late 1980s. What’s the difference between what we think of today as a real estate private equity fund, and another vehicle that’s been around for a much longer time, a real estate equity syndication?
Dr. Peter Linneman: When we talk about a syndication, which still exist, they are a very common mechanism — a syndication says: here is the property, 712 Manhattan Lane. A very specific property, and I’m going to go out and raise money from a pool of investors for that specific identified property, at identified pricing, at identified management terms. It could be pooled, I could have three properties in there, but it’s not “blind” — you (as investor) know exactly what you’re getting and that’s what you’re signing on for.
A private equity vehicle is different. It says: what I’m going to do is go out and raise money from investors based on my reputation, my strategy, my track record, my credentials, my investment objectives. I’m going to raise the money ahead of time, I’m not going to have any properties I can show you, all I can show you is who is my team, what’s my philosophy, what’s my track record, here’s my reputation, here’s where we all went to school, here’s what we did in our prior life… and you give me money ahead of time with which I then will go out and invest on behalf of this pool of investors.
It’s very much a “trust-me” vehicle, it’s a blind vehicle — you don’t know what they are going to buy… you know who they are (up to personnel leaving), you know what their strategy is (up to them changing it), but you’re buying specific properties, you’re buying into a concept in a private equity vehicle, and you’re obligated to provide money under contractual terms: contractual fees, contractual profit splits, contractual governance.
The governance usually is the manager who is raising the money. They get to decide how to operate the property, and how to invest the money, and how to dispose of the properties, at their sole discretion, as long as they’re a good fiduciary and they’re not doing fraudulent things. So (PE funds and syndications) are very different.
Private equity is a much harder vehicle to raise money for, because it’s a trust-me vehicle, as opposed to a traditional syndication where you know what you’re buying. You still have to trust me to manage it well, you still have to like the pricing, but at least you know what you’re buying.
But the hard part of a syndicate is (from the syndicator’s side): well, I don’t have the money with which to tie up the property, so what happens in the traditional syndication that’s made it difficult is, I don’t have the money, but I have to convince the seller to let me tie up their property while I go put the syndicate together and market the property, and that may take three to six months to get the money corralled and to put together documents, meanwhile, hold on, I’ve got a sole right to buy your property.
The beauty of private equity is, it may take me two years to raise the blind pool, because it’s a slow process, but once I’ve raised it, I can go to sellers and say: here’s the money. I’ve got the money, I put the money down, they don’t worry about “I wonder if he’ll be able to raise the money”. So they each have their pros and cons as a way to operate. The thing I would close that comment on is, increasingly, private equity funds are almost becoming like brand name money managers.
There’s a few, I think there’s a wave of consolidation underway, brand names. Not just reputation of good firms, but brand name. There are a lot of good firms but there are only a few brand names. And the business in private equity, since it is very much a trust-me business, it’s very much make sure you’re comfortable with who you give the money to and nobody will ever second-guess you — it’s reputation plus brand, and you’re starting to see firms like Blackstone, Colony, Apollo, Carlyle go beyond reputation to brand, whereas a lot of people who have very good reputations are finding it harder to raise private equity vehicle and are looking more to syndicate.
Bruce Kirsch: In a private equity fund, typically there’s a finite life to the fund. Is that typically the same with the syndication, where they say, here is the property and we’re going to hold it for 5 years? Or is it more open-ended?
Dr. Peter Linneman: Syndicates tend to be more open-ended, they can have a finite life, but more typical in a syndicate is something that says: this is the owner, this is the operator, they get to decide (usually in their sole discretion) when the right time to sell is… there might be some outside date of 10 or 15 years, or there may be something that if 70% of the money says you have to sell, you have to sell, but it tends to be a longer-lived, more open-lived phenomenon.
When you look at private equity, remember, it’s a pure trust vehicle… “trust me, I’m going to buy what you want, I’m going to sell what you want, I’m going to do all these things”. The pushback then becomes, “OK, I’m only going to give you 3 or 4 years to invest the money, and I’m only going to give you maybe 7 or 8 years total to have my money, after which you have to give it back, no matter what, unless I as the investor say otherwise.”
So as a trust vehicle, there are more restrictions put on it the greater you have to have trust… “Trust is fine, but” — syndicates generally have longer lives and more flexible lives.