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Article

Waiting to Be Called: The Impact of Manager Discretion and Dry Powder on Private Equity Real Estate Returns

Thomas R. Arnold, David C. Ling and Andy Naranjo
The Journal of Portfolio Management Special Real Estate Issue 2017, 43 (6) 23-43; DOI: https://doi.org/10.3905/jpm.2017.43.6.023
Thomas R. Arnold
is deputy global head and head of Americas in the Real Estate and Infrastructure Department at Abu Dhabi Investment Authority (ADIA) in Abu Dhabi, UAE
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David C. Ling
is the McGurn professor of Real Estate in the Department of Finance, Insurance, and Real Estate in the Warrington College of Business at the University of Florida in Gainesville, FL
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Andy Naranjo
is the Emerson–Merrill Lynch professor of finance and chairman in the Department of Finance, Insurance, and Real Estate at Warrington College of Business at the University of Florida in Gainesville, FL
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Abstract

In this article, the authors investigate the performance sensitivity of private equity real estate (PERE) funds to capital deployment speeds, investment horizons, management fees, and investor opportunity costs from uncalled capital. The authors first provide a series of simulation scenarios demonstrating the significant effects of these factors on PERE performance and then use PERE fund data to empirically investigate their performance effects. Using a comprehensive dataset from Cambridge Associates covering a large sample of 497 funds sponsored by 201 managers with aggregate assets under management of $383.9 billion from 2000–2013, the authors find that capital deployment speeds vary significantly across funds and over time and that very little of this variation is incorporated in traditional performance metrics. Importantly, the dilutive effects of management fees are positively related to the time over which capital is deployed and negatively related to the percentage of net capital called from investors and deployed by the fund manager. The authors also model the significant opportunity cost investors incur when reserving funds for uncertain capital calls. This cost of maintaining dry powder for the manager is ignored in reported performance metrics. Taken together, the authors’ results show the importance of accounting for capital deployment speeds, investment horizons, management fees, and uncalled capital in determining PERE fund performance.

  • © 2017 Institutional Investor, LLC
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The Journal of Portfolio Management: 43 (6)
The Journal of Portfolio Management
Vol. 43, Issue 6
Special Real Estate Issue 2017
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Waiting to Be Called: The Impact of Manager Discretion and Dry Powder on Private Equity Real Estate Returns
Thomas R. Arnold, David C. Ling, Andy Naranjo
The Journal of Portfolio Management Sep 2017, 43 (6) 23-43; DOI: 10.3905/jpm.2017.43.6.023

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Waiting to Be Called: The Impact of Manager Discretion and Dry Powder on Private Equity Real Estate Returns
Thomas R. Arnold, David C. Ling, Andy Naranjo
The Journal of Portfolio Management Sep 2017, 43 (6) 23-43; DOI: 10.3905/jpm.2017.43.6.023
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  • Article
    • Abstract
    • THE ECONOMICS OF INVESTING IN PERE FUNDS
    • SIMULATING PERFORMANCE COSTS OF DEPLOYMENT SPEEDS, INVESTMENT HORIZONS, MANAGEMENT FEES, AND OPPORTUNITY COST OF WAITING TO BE CALLED
    • PRIVATE EQUITY REAL ESTATE FUND DATA
    • PERE DEPLOYMENT SPEEDS AND PERFORMANCE
    • CONCLUSION
    • APPENDIX A
    • APPENDIX B
    • ENDNOTES
    • REFERENCES
  • Info & Metrics
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  • PDF (Subscribers Only)

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