By Brian Malliet | download the pdf +
In fund management, size matters. While managers with a wide, general focus continue to attract investor interest, niche-focused funds have emerged as the newest darlings of the fund management world.
In January of 2015, Preqin reported that more than 500 U.S.-based institutions were investing in private real estate funds that target niche properties, and we expect to see that number grow in 2016 and beyond.
As a niche-focused fund, BKM Capital has identified three major factors that will help other niche fund managers to leverage current investor interest and drive their businesses forward.
1. Ensure that your strategy is laser-focused
A narrow focus makes you the expert in your field. Fund managers who can successfully focus on a single investment product type and/or geography are more likely to secure capital. As an example, our firm only acquires multi-tenant industrial product in the Western U.S.
Because our expertise in this sector is deep, we are positioned to capture the upside of these assets and produce strong yields for our investors. We are sourcing and buying multi-tenant industrial assets that are 50% below peak pricing and about 50% below replacement costs as well. From there, we use our operator model to turn the asset around, stabilize it and bring in strong returns upon stabilization. We also have a seasoned team with a proven track record in this specific niche to execute on this strategy.
By narrowing your strategy, smaller fund managers can capitalize on their expertise and on market timing to ensure that their performance rivals—and in many cases—exceeds, that of larger managers.
2. Invest when the time is right
The most important part of devising a niche strategy is ensuring that your niche is well posi-tioned, and well timed.
For example, our team recognized that the time is right for investment in multi-tenant industrial product, based on the fact that this product type has lagged the rest of the industrial sector. While big-box industrial product bottomed out years ago and has now made more than a full recovery, rents in multi-tenant industrial weren’t at their bottom until about a year and a half ago. Now, we’re seeing occupancy rise and rents drive up.
This translates into a well-timed opportunity to deliver the highest yields for our investors.
This opportunistic or value-add play is centered on taking advantage of a lagging market at the right time, and then restructuring the capital stack. This is something that any operator of institutional quality product understands.
As niche fund managers look to attract institutional quality investors, the right timing is critical.
3. Prove yourself by proving your strategy
According to a fundraising outlook report by Preqin, a majority of real estate investors will not invest in first-time funds.
However, in the past two years, there has been a slight increase from 16% to 20% in investor interest in first-time funds. We anticipate that interest will increase as more niche funds enter the market, and prove that the yields are there.
That said, most investor interest is contingent on a proven track record. In short—the more assets under management, the greater the likelihood of raising capital.
As a new fund, our firm understood the challenge of proving that we could deliver on our strategy. Rather than beginning with institutional fundraising, we started by raising a friends and family round and investing in value-add multi-tenant industrial assets before raising our institutional fund. That process allowed us to invest more than $100m in properties that have an anticipated 20% return. For us, that was a compelling story during our fundraising. In fact, in early 2016, we closed our debut institutional fund at $105m.
A niche fund manager who can prove that their platform works, can succeed in attracting the capital that will keep their business moving forward for years to come.
Looking ahead, niche funds will continue to rise in popularity based on their ability to leverage specific market shifts and deliver high yields. As this activity continues, institutional investors will increasingly recognize the potential for long-term growth and value in these targeted real estate investments.
Brian Malliet is the CEO and Co-Founder of BKM Capital Partners, a fund manager and operator platform targeting value-add, multi-tenant industrial real estate in the Western U.S. The firm recently closed its first commingled fund, with $105m in equity commitments.