The Benefits of Private Equity Funds

If you are involved in real estate development, you can understand how difficult it can be to receive funding for some projects. In fact, most of the time, the developer has to invest a small fraction of the money that is needed to complete the project. Let’s look at a property that is $10 million for example. The bank might lend about 70% of the capital which would be $7 million. This would leave approximately $3 million of equity to be covered. To cover these costs, the developer would then raise anywhere from 80-95% of the remaining capital from investors which might come to roughly $2.7 million. Finally, they would invest the final $300,000 themselves. This ends up being 3% of the total costs which may not seem like much, but $300,000 is a considerable amount of money for any individual or team to have on hand. One way that developers look to combat this never-ending need for funding is by establishing Private Equity Funds where investors would invest money that would then be used to fund development projects in the area.

These private equity funds can be the most appealing model to gain exposure in the private real estate sector, and there are a few reasons for this. These funds are the best source of capital for both making investments and building a long-term real estate platform. Managers of these private equity funds also have a distinct advantage in today’s market, as they provide a speed of execution and a certainty of closing as opposed to other managers who require partner approval or additional fundraising. This fund model also provides a steady management fee stream that allows managers to build a business that is sustainable in the long run and attract the best talent available.

Savvy investors will understand the potential for substantial returns on their investments. Of all the funding opportunities available, private equity funds can often provide the largest amounts of money.

© 2019 R Bruce Fazio