Practical Research: Establishing a Private Equity Fund

Creating a Private Equity Fund White Paper

To help demystify private equity fund formation and operation, the NAIOP Research Foundation commissioned a white paper titled "Creating a Private Equity Fund: A Guide for Real Estate Professionals." Published April 2019, the paper is geared toward those who have limited familiarity with the process and want to learn the basics. The authors provide step-by-step guidance, along with an example of a fund waterfall and a case study of how one company successfully used a series of private equity funds to seek out opportunities during the financial crisis when other sources of funds were limited.

The paper was co-authored by Shaun Bond, Ph.D., West Shell Jr. Chair in Real Estate at Lindner College of Business, University of Cincinnati; and Jan deRoos, Ph.D., HVS Professor of Hotel Finance and Real Estate at SC Johnson College of Business, Cornell University. Bond is a current NAIOP Research Foundation Distinguished Fellow; deRoos is a former Distinguished Fellow who stepped down in 2018.

“The level of interest in this report has been unprecedented,” said Bond. “It has clearly touched on strong demand from developers and other industry professionals who are looking to tap into alternative sources of funds and diversify their capital base.” The report strongly emphasizes the fact that the most successful entrepreneurs put good real estate decisions at the heart of their business model, Bond added. “We also stress the importance of transparency and arms-length benchmarking of fees to create credibility with investors.”

Key takeaways from the white paper include:

  • The real estate private equity fund industry has grown into a multi-billion dollar global business. However, scale is not necessary to be successful; smaller fund managers can create value and returns for all parties involved.
  • Real estate funds can allow sponsors (managers) to diversify and expand funding sources, invest in larger, higher-quality projects, obtain better terms from banks, and earn fees from the fund, including promoted interest.
  • Fund managers must go into the endeavor prepared. They must consider the amount of equity capital to be raised, including fees; be aware of the amount of time required to launch and maintain the fund; and have a clearly articulated investment fund strategy.
  • Sponsors typically collect compensation through promoted interest and an assortment of fees. However, sponsors should not see their fund as a vehicle for generating fees at the expense of their investors. In addition, and as this paper details, sponsors should also be aware of securities laws and other regulations, and how to properly produce offering materials.
  • The most important aspects of setting up a private equity fund, no matter the strategy, are to have solid, trustworthy fund leadership and a transparent communication style. The fund manager's reputation is essential to attracting investors and successfully managing the risks.

White paper co-author Jan deRoos, Ph.D., and John Hurley, co-founder and principal with Penwood Real Estate Investment Management, LLC, led a webinar previewing the white paper in February 2019. The webinar recording, including Q&A session, is available online for streaming and download (free for members; available to purchase for nonmembers).

Development magazine also covered the topic in a two-part series. Read part one and part two online.

To learn more about the Foundation’s research and view all current research reports, visit