Real Estate Private Equity
What Is Private Equity Real Estate?
Private equity real estate is an alternative asset class that consists of professionally managed pooled private and public real estate investments. Investing in private equity real estate entails acquiring, financing, and owning (direct or indirect) property or properties through an investment fund.
Private equity real estate should not be confused with an equity real estate investment trust, or equity REIT, which are publicly listed shares that reflect real estate investments and derive most of their revenue from rental income on their real estate holdings.
Main Takeways
- Private equity real estate is a professionally managed real estate fund.
- Private equity real estate investing, unlike REITs, needs a significant amount of capital and may be limited to high-net-worth or accredited investors.
- This type of investment is frequently riskier and more expensive than other types of real estate investment funds, yet returns of 8% to 10% are not uncommon.
Understanding Real Estate Private Equity
Private equity real estate funds enable high-net-worth individuals (HWNIs) and organizations such as endowments and pension funds to invest in real estate equity and debt holdings.
Private equity real estate uses an active management technique to diversify property ownership. General partners (GPs) invest in a wide range of property types in various places, including new development and raw land holdings, total rehabilitation of existing properties, and cash flow infusions into distressed assets.
Private equity real estate investments are frequently pooled and can take the form of limited partnerships (LPs), limited liability corporations (LLCs), S-corps, C-corps, collective investment trusts, private REITs, separate insurance accounts, or other legal structures.
Latest regulation by Bangladesh Securities and Exchange Commission (BSEC)
The Bangladesh Securities and Exchange Commission (BSEC) announced the regulation on June 22, 2015. Previously, there was no regulation in Bangladesh regulating Private Equity and Venture Capital financing. Bangladesh Securities and Exchange Commission (Alternative Investment) Rules, 2015 (the Rules) went into force on June 22, 2015.
The restrictions apply to private equity and venture capital funds managed by a fund manager through a registered trust. The fund manager and trustee must be BSEC-registered.
The fund managers will raise funds from approved investors, which might include institutions, high-net-worth individuals, and overseas fund managers. The funds cannot be generated through a public issue or an initial public offering; they can only be raised through a private placement and, unlike other mutual funds, will not be listed or traded on stock exchanges.
According to the rules, venture capital funds may invest primarily in non-listed equity and equity-linked securities of start-ups with less than two years of operational history, green field companies, or emerging early-stage undertakings primarily engaged in new products, services, technologies, intellectual property rights-based activities, or new business models.
Operational Requirements for Real Estate Private Equity
To become operational, a local fund management business must have at least Tk. 50 million in paid-up capital. A fully-owned subsidiary fund management company must have at least Tk. 150 million in paid up capital, while a partially-owned subsidiary overseas firm must have at least Tk. 100 million in paid up capital.
The applicant firm must have a minimum net worth of 75% of its total paid up capital; however, if a fund manager’s net worth falls below 75% of its total paid up capital at any time, it must raise it to the requisite level during the next accounting year.
The firm’s chief executive officer or chief investment officer, as well as its compliance officer, must each have a relevant academic background and at least seven years of relevant professional experience, and neither the applicant nor any of its directors will be a loan defaulter.
Registation fee and process:
The registration price is one lakh taka, and the annual charge is 50,000 taka.
The fund manager is entitled to an annual fund management fee of up to 4% (four percent) of the fund’s NAV (net asset value) for managing an impact fund, 3% (three percent) of the fund’s NAV for managing a venture capital fund, and 2% (two percent) of the fund’s NAV for managing a private equity fund.
The fund manager may receive up to 20% of a fund’s net yearly earnings.
Concerning the criteria for the formation of an alternative investment fund, such fund size will be at least Tk. 100 million, and the sponsor’s subscription will not be less than 10% of the fund, provided that the sponsor will subscribe at least 20% of its entire subscription to the fund prior to the fund’s registration.
The fund management must contribute at least 2% of the fund’s size; however, if the fund manager also acts as the fund’s sponsor, this investment must be made in addition to its contribution as the fund’s sponsor.
The fund manager and its affiliated persons may not own more than 25% of a fund’s units at any time. The sponsor must commit to a continuous investment of at least 2.5% of the fund’s total size.
This fund will pay cash dividends to unit holders alone and will be locked in for three years from the date of unit issue.
Particular Considerations
Investing in private equity real estate necessitates a long-term perspective and a considerable upfront cash commitment—more than BDT 10 crores initially, with follow-on investments over time. Investors have little flexibility and liquidity because the capital commitment window often lasts several years.
Private equity real estate lock-up periods can sometimes span a dozen or more years. Furthermore, distributions might be sluggish because they are frequently paid from cash flow rather than outright liquidation—investors do not have the right to demand a liquidation. Furthermore, fund managers often charge a 2-and-20 fee structure, which costs investors 2% of invested assets plus 20% of profits per year.
Private equity real estate is invested in by the following types of investors:
- Institutions (pension funds and nonprofit funds) and third parties investing on their behalf, such as asset managers
- Accredited private investors
- Individuals with a high net worth (HWNIs)
- Individual investors are normally required to fund their investments at the time of signing the investment agreement, whereas institutional investors are required to make a capital commitment. This money is then depleted as appropriate investments are made. Nothing can be extracted from the commitment if no contributions are made throughout the investment period indicated in the agreement.
Private equity real estate investing is risky, but it may pay off handsomely.
Returns on Private Equity Real Estate
Despite the lack of flexibility and liquidity, this sort of investment has the potential to offer significant amounts of income as well as considerable price gain. Annual returns for core strategies in the 6% to 8% range and 8% to 10% for core-plus strategies are not unusual.
Value-added or opportunistic tactics can generate significantly better returns. However, private equity real estate is sufficiently hazardous that investors can lose their entire investment if a fund underperforms.
Private equity real estate funds became popular in the 1990s as a mechanism to buy properties as they plummeted in value. Previously, the majority of institutional real estate investing focused on core properties.
Legal Issues and Mitigation strategies in Real Estate Private Equity
| Legal Issues | Description | Mitigation Strategies |
|---|---|---|
| Land Ownership and Acquisition | Complex land ownership laws, disputes, and the need for thorough due diligence when acquiring land. | Engage experienced legal counsel for land title verification and dispute resolution. |
| Regulatory Compliance | Navigating the intricate regulatory framework in Bangladesh, including company registration and foreign investment regulations. | Establish a clear compliance protocol and stay updated on regulatory changes. |
| Taxation and Financial Compliance | Understanding and adhering to income tax, capital gains tax, and value-added tax (VAT) obligations for REPE investments. | Consult with tax experts to ensure accurate financial planning and compliance. |
| Environmental Regulations | Meeting environmental impact assessment (EIA) requirements and obtaining approvals from the Department of Environment (DoE). | Conduct thorough EIA studies and engage in transparent communication with environmental authorities. |
| Political and Economic Stability | Mitigating risks associated with political and economic instability in Bangladesh. | Diversify investments, monitor geopolitical developments, and adapt strategies accordingly. |
| Infrastructure Development | Addressing the need for infrastructure development to support real estate projects. | Collaborate with government initiatives and invest in infrastructure as part of the project plan. |
| Foreign Investment Restrictions | Complying with regulations governing foreign investments in the Bangladeshi real estate sector. | Seek guidance from the Bangladesh Investment Development Authority (BIDA) for foreign investment approvals. |
| Legal Documentation and Contracts | Ensuring the adequacy and legality of contracts and agreements with project stakeholders. | Engage experienced legal professionals to draft and review contracts thoroughly. |
| Land Use Zoning and Planning | Adhering to land use zoning laws and urban planning regulations for real estate projects. | Collaborate with local authorities and urban planners to align projects with zoning requirements. |
| Dispute Resolution | Addressing potential disputes related to land ownership, contracts, or project execution. | Incorporate dispute resolution clauses in contracts and be prepared for alternative dispute resolution methods. |
Private equity real estate investment types
The most common private equity real estate investments are office buildings (high-rise, urban, suburban, and garden offices); industrial properties (warehouse, research and development, flexible offices, or industrial space); retail properties, shopping centers (neighborhood, community, and power centers); and multifamily apartments (garden and high-rise).
There are other specialist property investments available, such as senior or student housing, motels, self-storage, medical offices, single-family housing for sale or rent, undeveloped land, manufacturing space, and others.
Our property lawyers have experience dealing with private equity arrangements, joint ventures, limited partnerships, unit trusts, REITs, and other co-investment agreements, as well as the legal and business challenges that come with them.
Whether it is a sale and leaseback, a development project, a workout, an income-producing investment, a portfolio acquisition, a mortgage portfolio transaction, or a trading transaction. The appropriate structure can be designed to your transaction, taking into account considerations such as transfer tax, accounting treatment, local market and currency challenges, and risk allocation.
Our real estate attorneys have helped clients through the complete life cycle of corporate real estate structures, including initial structure selection, tax optimization, vehicle creation, funding, purchase, asset or project management, and exit strategy.
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