WEALTH MANAGEMENT / REGISTERED INVESTMENT ADVISOR

Case Study: Private Equity Real Estate in Focus

The need for alternative streams of tax-protected income brings private equity real estate into focus for $500mn AUM wealth management firm

At a glance

The Challenge

The traditional balanced portfolio of equities & fixed income has failed to deliver on its promise - and early 2022 has underscored the issue – with equities and fixed income moving in lockstep. The need for more alternatives in the portfolio is clear. But selecting the right strategies is easier said than done. Many strategies have risks that might not be readily apparent to fiduciaries and can be difficult to conduct due diligence on. With the tremendous diversity of strategies and asset types in alternatives – how does an allocator decide what is best and achieve the ideal end state - a portfolio with multiple, uncorrelated sources of return?

Insights

Finding the right solution involved getting an understanding of the objectives with respect to income generation, total return, volatility, and risk profile.   Reliable, predictable cash flow via quarterly dividends was front and center for this RIA.   The strategy had to have minimal volatility and be low risk.   With yield being the focus – private credit strategies that generate 8-12% annually were seriously considered.  These strategies involve lending – e.g. either to consumers or loans on real estate and often produce very consistent annual yield numbers.  Ultimately – these strategies were rejected for the following reasons – no inflation protection, upside is strictly capped (no potential to make more than the target return – only less, in the event of higher than forecast default rates), and risks can be magnified in recessions.   

Net lease real estate was evaluated on the same criteria – and while the cash yield was lower in net lease than private credit (cash yields of 6-8% instead of 8-12%), the net IRR was higher (15-20%), there were inflation protections, and the risks were easier to model and understand.  Prairie Hill’s focus on recession-proof tenants, rigorous tenant credit underwriting, and adaptive use real estate provided significant risk mitigation.

Results

The wealth manager made the decision to invest with Prairie Hill in professionally managed commercial real estate as the best path to achieve their objectives with alternatives.   Acquisitions in grocery stores, and multi-tenant retail/QSR were made in at the end of the 2021.  During the past two years, the wealth manager’s clients are realizing the numbers that were forecast – a  7%+ net cash yield and 15%+ IRR.  In addition to hitting the parameters needed, Prairie Hill has made it very easy for the wealth manager to have clients in this investment – on-time K-1s, integration with portfolio accounting systems at the RIA, transparent NAV reporting, and an online investor portal. None of the usual headaches associated with private investments.

Moving Forward

Private real estate has proven itself with a very long track record of outperformance.  Access to this asset class, however, has been difficult for many wealth managers of separately managed accounts – since they often don’t meet minimum check sizes for institutional private equity, and direct investment is an unwise move without the proven team and expertise. Prairie Hill changes those dynamics, by bringing institutional quality asset management to the table with an accessible check size.