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

Thomas R. Arnold, David C. Ling and Andy Naranjo
The Journal of Portfolio Management Special Real Estate Issue 2019, 45 (7) 24-42; DOI: https://doi.org/10.3905/jpm.2019.1.103
Thomas R. Arnold
is global head of real estate at Abu Dhabi Investment Authority (ADIA) in Abu Dhabi, United Arab Emirates
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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 John B. Hall Professor of Finance and the chairman of 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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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: Statistical methods, real estate, 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.

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The Journal of Portfolio Management: 45 (7)
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Vol. 45, Issue 7
Special Real Estate Issue 2019
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Private Equity Real Estate Funds: Returns, Risk Exposures, and Persistence
Thomas R. Arnold, David C. Ling, Andy Naranjo
The Journal of Portfolio Management Sep 2019, 45 (7) 24-42; DOI: 10.3905/jpm.2019.1.103

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Private Equity Real Estate Funds: Returns, Risk Exposures, and Persistence
Thomas R. Arnold, David C. Ling, Andy Naranjo
The Journal of Portfolio Management Sep 2019, 45 (7) 24-42; DOI: 10.3905/jpm.2019.1.103
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  • Article
    • Abstract
    • BACKGROUND AND MOTIVATION
    • EMPIRICAL STRATEGY
    • DATA
    • PERE FUND PERFORMANCE, FUND CHARACTERISTICS, AND MACROECONOMIC RISK EXPOSURES
    • CONCLUSION
    • ACKNOWLEDGMENTS
    • ADDITIONAL READING
    • ENDNOTES
    • REFERENCES
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