Menlyn Link – Johannesburg, South Africa
As humans, we tend to stick with what we know and trust. Unfortunately, this tendency can prevent us from pursuing once-in-a-lifetime opportunities, taking calculated risks, and achieving our goals. At JTOO Ventures, we frequently notice this issue when we meet with prospective investors and analyze their portfolios. Most individuals simply aren’t taking advantage of the lucrative alternative investments that are available.
Donald Calcagni, chief investment officer at Mercer Advisers, a registered investment adviser based in Santa Barbara, California, sums it up pretty well: “People stick with stocks and bonds because that’s what they see every night on the evening news.”
Just because stocks and bonds are so well known, doesn’t mean they’re providing the best return on investment, which is why investment managers around the globe are seeking alternative investments to diversify their portfolios and outpace public equities. Nearly all top financial advisors recommend alternative investments for high net worth individuals, including a mix of private equity, hedge funds, managed futures, real estate, commodities, and derivatives contracts.
“There’s no way to outperform the stock market by investing only in the stock market,” Calcagni says. So in order to achieve higher returns and surpass the limitations of the stock markets, investors are turning to alternative investments. This trend can be seen in a variety of sectors. For example, according to the National Association of College and University Business Officers, “managers of higher-education endowments now allocate a majority of their assets to alternative investments.”
Private equity real estate is quickly becoming the alternative investment of choice for sophisticated investors worldwide. Investment managers are incorporating real estate into their portfolios for superior returns at lower volatility. In its 2018 Public Pension Study, the American Investment Council (AIC) analyzed investment returns by 163 U.S. public pension funds and found that on a dollar-weighted basis, U.S. public pension funds invest 8.1% of their portfolios in real estate, with another 8.6% of the portfolios in private equity–a combined total of $578 billion. So why all the hype surrounding private equity real estate investments?
Since real estate prices aren’t correlated to the cycles of stocks and bonds, returns are higher compared to other alternative investments with similar expected risk. Plus, property values and rents generally keep pace with inflation. Rental income is also an important factor, as it makes up about half of the returns on real estate (appreciation is also a factor). Yet according to Brian Davis, “the most interesting case for real estate lies in its risk-reward ratio.”
When a team of economists from the University of California, Davis, the University of Bonn, and the German central bank reviewed over 145 years of economic data from 16 countries, they found that residential real estate provided extremely high returns with low risk. In fact, when compared to equities, residential real estate, short-term treasury bills, and longer-term treasury bonds, residential real estate had the best returns, averaging over 7 percent per annum. When measuring the investment’s Sharpe ratio (essentially a risk-reward ratio), real estate averaged 250% better than treasury bonds (0.2) and 185% better than equities (0.27).
Numbers don’t lie, and the numbers are all pointing to real estate as an excellent alternative investment opportunity for discerning investors who seek higher returns. So why isn’t everyone investing in private equity real estate? Traditionally, there has been a high barrier to entry, which has kept many investors out of the residential real estate space: “The minimums to get into a quality fund are often too high for most investors — usually $250,000 per fund,” says Calcagni.
So while many investment managers have been championing real estate investments for some time, many investors simply haven’t been able to play ball.
However, our goal is to provide new ways of co-investing with lower minimums for savvy investors who understand the strategy of alternative assets such as private equity real estate and want to diversify their portfolios with higher return, lower volatility assets. Keeping factors such as risk tolerance, tax situation, time horizons, and objectives in mind, we can help you position your portfolio to win with a private equity real estate investment.
Subscribe to learn more about private equity real estate.