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kelley-school-of-business.jpg Photo by the Kelley School of Business
Kelley students who helped establish the Sample Gates Management Inc. fund, with Doug McCoy, the Al and Shary Oak Director of Real Estate, a teaching professor of finance and director of the Center for Real Estate Studies

How Indiana University Students Are Deploying Their Own Private Equity Real Estate Fund

Business students at the school have recently launched their own private equity real estate fund, which aims to deliver returns to real-life investors. Here’s how they raised the money and plan to deploy their capital.

Undergraduate business students at Indiana University will get real-life lessons in how to intelligently deploy investors’ money after launching a $4.2 million private equity fund to invest in commercial real estate—a program that should also help the students get jobs in the private sector when they graduate.

The fund, called Sample Gates Management LLC, has been dubbed by the Kelley School of Business as the largest undergraduate student-managed real estate private equity launch in the country when measured by money raised. Similar programs across the country have been done at the graduate level and usually involve school funds or an angel investor, school officials say. In 2021, Marquette University launched what was called the first undergraduate real estate investment fund in the nation with $1 million.

During the fall semester, the students at the Kelley School of Business raised the funds from financial firms and investors, including many IU alumni. They are currently seeking out investment opportunities and honing their investment strategy and will begin deploying capital this semester, primarily as limited partners.

“This private equity program is now opening up an entire pipeline of students to be ready to go,” says Doug McCoy, a professor in real estate at Indiana University who was instrumental in setting up the program. “When our students sit down for an interview, we want them to sound like an experienced professional… But how can you get there? You can’t fake that or force that. You have to immerse yourself, and we’re giving them the opportunity to do that through our platforms.”

The Sample Gates Management fund has been under development for three years after then-freshman student Patrick Engels, who graduated from the business school in 2021 and now works as an analyst at a New York investment management firm, suggested it to McCoy. Another alumnus, J. Timothy Morris, founder and partner of privately-held real estate investment firm Proprium Capital Partners, helped develop the concept further, and Tom Peck, chief investment officer at investment firm Hageman Group, serves as the fund’s faculty advisor.

How it came about

McCoy, the Al and Shary Oak director of real estate and a professor of finance who directs Kelley’s Center for Real Estate Studies and who previously worked for Duke Realty, says Engels’ idea, which had been suggested in the past, faced some obstacles in coming to fruition. They had to approach the school with the right team or risk getting rejected—a distinct possibility in doing something innovative when working with a bureaucracy compared to the private sector. The fund had to be signed off on by the university president and by IU board of trustees.

“One of the most difficult parts was forming a new entity because universities don’t like to have a lot of extraneous entities out there,” McCoy says. “There was also a concern about liability, and with outside counsel help and help from a lot of people on a pro bono basis who were IU alumni, we were able to work through the process that took about three years. We were able to get over the hump when we were able to demonstrate that an entity could be formed that would shield the university from potential liability.”

Today, the fund has 42 individuals and 44 entities who have invested, according to Will Huber, student president of the IU real estate private equity program and a senior majoring in finance and real estate who will work as an analyst for Slate Asset Management in Chicago after he graduates in May. A significant majority of the investors are successful in the real estate industry and have ties to IU and they wanted to support the initiative, he adds. Of the 42 private investors, many are family trusts or LLCs set up for personal investment.

“They thought it was a cool and innovative idea and some of the more involved alumni were easy sells because they were excited this was a thing in the first place,” Huber says. “In terms of scooping up the other half to $3 million of the fund, we had to go on a road show where we brought all the prospects we thought might be interested in investing.”

During the fall, students pitched prospective investors at events in Chicago (which was held at a conference space lent by an IU graduate, organized by the students themselves and attended by more than 20 people, mostly Chicago-based university alumni) and in Indianapolis (which was held during the fall luncheon of the IU Center for Real Estate Studies and attended by more than 200 people). The students also met with the prospective investors individually. The contributions ranged from $25,000 to $300,000, with the average somewhere between $100,000 and $150,000.

“Our pitch of what value we could bring to them was twofold—convincing them to support the educational side of things and experience we get as students, and showing them how we leverage our position with the school to find unique investment opportunities that aren’t necessarily available to your typical investor,” Huber says.

When the 16 students who oversee the fund meet twice a week, Peck provides professional oversight and guidance and makes sure they’re not leaving anything out of their discussions, Huber notes. McCoy and Morris provide further oversight.

The fund has formed an investment committee of the most involved or largest investors who must approve the fund’s investment decisions, according to Huber. He notes his internship last summer at Walton Street Capital, a private equity fund based in Chicago, gave him insights into how to help run the class by showing him how professionals go about thinking about deals and placing capital.

The program should help students understand the underwriting process and how to perform financial analysis of what's a good and or a bad deal and how to do their due diligence, including seeing how a property competes in the market, according to McCoy. The students have a pipeline of potential transactions, and they have to decide which ones are worthy of being presented to investors, he notes.

In fact, besides developing a better understanding of financials, students learn how to make a presentation to the investment committee and manage a private equity firm, McCoy says. In the future, possibly in two years after the majority of the funds are invested, there might be second drive in which more students will learn how to start a fund from scratch.

It’s challenging for students to graduate and place in the private equity field unless they have the necessary experience, McCoy notes. Usually, that requires working two years as an analyst and doing underwriting and financial analysis work.

“This private equity program is now opening up an entire pipeline of students to be ready to go,” he says.

IU runs a vertically-integrated real estate program that includes a real estate club, a commercial real estate workshop and now the private equity fund. The Real Estate Club at Bloomington has seen a surge of student interest and doubled this fall from 250 members to nearly 500 members, according to Maliq Carr of Indianapolis, co-president of the real estate club and a senior majoring in finance. From there, students can apply to be part of the 60 students who are part of the commercial real estate workshop before they can seek a spot to work on the fund.

Details of the fund

The students set up a 10-year close-ended fund in which fundraising closed out on Dec. 31st.

The $4.2 million in capital will be deployed over a four-year investment window. The average deal size will range between $300,000 and $500,000, with eight to 12 deals expected for the first fund across a variety of asset classes and markets, says Huber.

“We purposely left our investment strategy in our marketing materials quite broad because our strategy was to leverage our relationships with this alumni network that IU has to bring us unique opportunities,” he notes. “We want to be open to anything we could potentially get our hands on because we know we can get those off-market opportunities and better terms on our partnerships because of the relationships that we have.”

Huber says most of the deals they’ve been fielding and looking into involve multifamily acquisitions, rehab and value-add projects throughout the Midwest and Sun Belt markets. They plan to deliver an 8 percent preferred return to investors, but the target return on the fund level is in the mid-teens, he adds.

The strategy is to diversify investments and allocate capital to different markets and asset classes and avoid taking on too much risk, Huber says. The group has looked into deals on light industrial assets that have different strategies, ranging from sale leasebacks to curing management inefficiencies. It also reviewed investments into affordable housing and hospitality portfolios, including many they had to pass on since they were still raising funds and those deals didn’t fit their investment strategy to start, he says.

“We have some connections in the self-storage space as well, so we expect to look at all of those assets, but we’re just getting started,” Huber says. “We’re just starting to dig in and bring things to our investment committee [on Jan. 26th] and time will tell where we see ourselves allocating funds based on what the investment committee and fund class as a whole think is the best strategy.”

The goal for the student participants this semester is to create a sense of accomplishment and give the next class something to build upon, Huber says. With a four-year investment window, they’re not going to rush into making investment bets because it’s “a volatile environment right now.” To help them better understand the current environment, the students are getting a lot of input from young graduates on an associate advisory board that tell them what they’re seeing in their markets and positions, he notes.

The reason for the fund’s focus on value-add multifamily is because it’s in the middle market, which is currently attractive and in which the students can compete, Huber says. This is the space where transaction volume is expected to pick up first, given the current interest rates. With floating-rate debt expiring or adjusting soon, Huber says they believe there might be some selloffs in the middle market multifamily space.

Most of the students’ investments will be limited-partner interests since they don’t have the capacity or experience to acquire properties outright and are unable to manage a property on a day-to–day basis, he notes. Most are syndications where they’re providing capital, but they will look into co-GP agreements with closer sponsors. They also have been approaching opportunities to provide some mezzanine or preferred equity piece in the capital stack, he adds.

“Some of our sponsors are going to be able to acquire properties for a really good basis, and multifamily compared to the rest of commercial real estate asset classes is generally a great hedge against inflation, given you can bump those rents yearly versus some of those longer-term lease properties. With the rent growth we have seen over the past two years, we don’t like betting on rent growth in these markets right now, and that’s why we targeted the value-add side of things, where our sponsors [are] either coming in and implementing their own in-house management team to improve efficiency or adding intrinsic value to the property with hopes to sell it a few years down the road once there’s an adjustment in the market.”

Among the lessons students have learned so far is that you can make any deal look good on paper, says Huber. The biggest challenge is focusing on the risks associated with each investment and not getting “trigger happy” on deal opportunities they’re receiving, he notes. They’ve put together an opportunity filter to screen investments and score them against each other to have objective data to present to the investment committee, he says.

One prospective deal, for example, involved an investment in a multifamily rehab project on the East Coast. According to Huber, the numbers on the project looked great at first and the students almost brought it to the investment committee, but on further review, found a few red flags, including in the underwriting and in the sponsor’s ability to execute their proposed business plan.

“That’s definitely been one of the bigger challenges of getting everybody onboard with that and to dig in and understand when you’re placing real money you have to have a deeper understanding of the risks associated with this investment,” Huber says.

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