Direct vs Fund Investing: What We Heard at the Real Estate Family Office & Private Wealth Management Forum

If you’re looking for real estate investment diversification strategies, perhaps you’ve considered the merits of direct investment vs funds. Rick Chichester, CEO of Faris Lee Investments, spoke as part of a panel presentation that discussed this topic at the recent Real Estate Family Office and Private Wealth Management Forum in Huntington Beach, California.
The expert panelists also included: Barry Levenson (moderator), Strategic Holdings, LLC; DJ Van Keuren, Arsenault Family Office; Mark Holland, Austerra Wealth Management LLC; David Kasprzak, Broadstone Real Estate LLC; Candice Beaumont, L Investments, and Jonathan Chang, Ophir Capital Group, LLC.
The panel provided a balanced perspective on the relative risks and merits of direct investment vs fund and what investor profiles are best for each strategy. Here are a few takeaways from the speakers:
“What matters is whether you really understand the investment goals and objectives of the family. If they are multi-generational, then you must gain a deep understanding, not just of the first generation, but you must also understand the willingness for risk of the second generation and beyond.  In terms of direct, you need to assess if they have the expertise and infrastructure for direct investment. Far too often, we discuss the investment and not the investor.”
“We look at one thing – trust and integrity with third party managers or the fund structure. We spend a lot of time looking at the track record and how they underwrite deals. We examine the kind of assumptions they make… it’s a combination of things. But the biggest factor for us is trust. After that we dive deeper into the strategy. In product types where we don’t claim to be experts we still check the boxes to see if the deal makes sense to us.”
“If you look at the patriarch of a family office, typically they are entrepreneurs. They are used to building something, being in control.  We’ve found that direct investment is more aligned with that mindset and returns are more in alignment with what they are looking to achieve. With that said, when the investor has a lower risk profile we move down the capital stack to talk about preferred equity as an option.”
“If an investment portfolio is a fruit basket, the hedge fund is the kumquat, private equity is the banana, and REITs are the apples. Even though the kumquat has something delicious inside, nobody really knows what to do with it or how to get to it, so they pass it up. Private equity is the banana. It has a thick skin but once you peel it back, it’s pretty straightforward. And the REIT is an apple; you just pick it up, shine it off and take a bite. However with REITs, you pick up a lot of market volatility you wouldn’t with direct investments. If there is a terrorist act in the Middle East, your Taco Bell in Birmingham won’t skip a beat, but your REIT probably will.”
Overall, the key takeaway was that there is no “one-size-fits-all” answer; the ideal alternative investment strategy is case specific and may involve one, the other, or a combination of funds and direct investments, based on economic conditions, real estate product type, operator availability and relationships, and appetite for risk. Two points were universally agreed upon, however. First, alternative investments—real estate in particular—deserve a seat at the table. One panelist pointed out that Harvard’s current endowment is currently 18% real estate (mostly direct), and that Harvard and Yale are approximately 55%-60% allocated in alternative investments. Second, whichever way you decide to invest, do your due diligence: if you are going with a fund, interview the managers, the entire junior staff and tour their office. Identify red flags or areas of discomfort and heed them, remembering that past performance is not a guarantee of future results. If your preference is direct investing, vet and hire experienced staff and experienced operators who understand your goals and objectives, who can underwrite and/or complete all required due diligence accordingly.

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