Private Equity Real Estate Funds: Returns, Risk Exposures, and Persistence

Abstract

Using performance data through the fourth quarter of 2017 on 467 funds that came to market between 2000 and 2013, the authors of this article first examine the unconditional performance of closed-end, private equity real estate (PERE) funds over time and across various fund characteristics. The performance metrics they use are the internal rate of return, the multiple on invested capital, and a proxy for the public market equivalent. Using conditional sorts, as well as regression procedures with asset pricing specifications, the authors estimate the exposure of PERE performance to fund-level characteristics and macroeconomic environment risk factors and find that both significantly affect PERE performance. More specifically, they find that PERE performance is positively related to fund size, gross domestic product growth changes, private market real estate returns, interest rate changes, and default spread changes and is negatively related to vintage volume. International funds dramatically underperformed relative to domestic funds during the sample period. The authors also find that fund performance is positively associated with the performance of prior funds raised by the same PERE firm.

TOPICS: Real estate, statistical methods, risk management, private equity

Key Findings

• • Fund characteristics, market risks, and macroeconomic risk factors significantly predict PERE performance.

• • Fund performance is positively associated with the performance of prior funds raised by the same PERE sponsor.

• • Fund performance is negatively associated with vintage volume.