Private equity funds that have been hunting big game—institutional investors willing to write big checks—are increasingly expanding their sights to include the little guys. Accredited investors are landing on the radar for fund managers for good reason. Some industry research shows that accredited investors now represent an estimated 10.6 percent of all American households and control roughly $73.3 trillion in wealth.
New York-based Cadre is one of the latest real estate investment companies to introduce a private equity real estate fund that is accessible to accredited investors with a $50,000 minimum investment. Traditionally, Cadre has offered “single asset opportunities to both institutions and high net worth individuals, including the likes of Goldman Sachs. The Cadre Direct Access Fund will offer greater diversification with a group of about 15 assets when capital is fully committed.
The fund strategy is to pursue institutional-quality value-add investments. Whereas the 2008-2009 crisis hit all property sectors hard, the COVID-19 recession has created headwinds for some property types and tailwinds for others, notes Joe Williams, managing director & head of distributions at Cadre, a technology-driven real estate investment platform. “We think the fund is structured in a way to take advantage of both of those phenomena,” he says.
The fund’s target weighting for multifamily is going to be about 50 percent, while the other half of the portfolio will be divided by opportunistic investments in industrial development, as well as acquisitions in distressed office assets, suburban office and distressed hospitality properties. Geographically, the fund will target investments in about 15 markets across the U.S., focusing mainly on high-opportunity secondary markets benefiting from demographic shifts and job growth trends, such as Austin, Phoenix and Tampa.
The target fundraise is about $400 million, which Cadre hopes to hit by the first quarter of 2022. The first close in late January exceeded expectations at more than $80 million. “The second close is set for late March, and we have a promising pipeline for that next close,” says Williams.
Funds face stiff competition
Cadre’s Direct Access Fund has launched in what has become a crowded pool of private equity real estate funds. “The market is flooded with new funds,” says Dr. Forrest Bryant, CEO of High Speed Alliance, an RIA and family office representing physician and dentists, 98 percent of whom are accredited or high net worth individuals. In some weeks, Bryant sees as much as $1 billion worth of private placement deals come across his desk from sponsors looking for capital. That competition, along with the growing wealth held by accredited investors, is creating an incentive for funds to pursue a broader spectrum of individual investors, including ultra-HNWI, HNWI and accredited investors.
Fund sponsors also are finding a more receptive audience of accredited investors. Five years ago, very few of the doctor and dentist clients that High Speed Alliance serves gave much thought to private placement real estate, mainly because it wasn’t available and it wasn’t known, notes Bryant. The traditional establishment would say that putting $50,000 or $100,000 into one private placement or private equity fund was too risky. Partly that advice was influenced by the fact that advisors didn’t have any way to monetize those recommendations, he adds. “Things have changed, and now you are seeing more RIAs with alternative investments and private placements on their platforms,” he says.
On the real estate side, High Speed Alliance’s clients invest in both direct ownership and private equity funds. “Obviously, the asset type is important, but we feel like the sponsor of the deal is one of the most important aspects,” says Bryant. “We do a lot of due diligence before someone is invited in to bring deals to our community.”
Standing out in a crowd
One of the challenges for new funds is making it past gatekeepers, the advisors and RIAs that are naturally protective of their client base. It’s really important to have a sponsor that has been in the business for a while and has been through some ups and downs,” says Bryant. For example, High Speed Alliance works with one industrial sponsor who has been in the business for more than 40 years and has experience across multiple market cycles and multiple funds. “That gives us confidence that they will keep performing when they have that kind of track record,” he says.
A solid track record certainly helps fund managers get a foot in the door with prospective investors. “It is certainly a challenging fundraising market, because there is a lot of competition out there,” says Williams. “However, I think our value proposition is unique enough that it gives us a story that we can tell in the marketplace that allows us to differentiate ourselves from the competition.” Since 2015, Cadre has acquired more than 38 assets across 20 markets in the U.S. Cadre also is maintaining a commitment to social impact within the fund. Cadre has made a commitment that 5 percent of its cash will be deposited with minority depository institutions (MDIs). The fund also has said that 10 percent of capital will be committed to minority operators in the local markets that they partner with to do deals.
“There is no secret sauce other than hiring the right people, having the right strategy and having the right story to tell in the marketplace, and I think we can check all of those boxes at Cadre,” says Williams.