Retail investor appetite for alternative investments—particularly commercial real estate—is bigger than ever, compelling RIAs to establish relationships with real estate investment firms. It’s a mutually beneficial arrangement—by working with real estate sponsors, RIAs can give their clients a broader range of investment products, and sponsors can efficiently access trillions of dollars in investment capital.
San Francisco-based Ashfield Capital Partners, an employee-owned independent RIA, has been working with real estate sponsors for several years. It currently serves more than 100 high-net-worth and ultra-high-net-worth families and has roughly $2 billion under management.
The firm’s objective to deliver the best risk-adjusted and tax-adjusted returns to its clients requires a highly customized approach, says Adrian Fadrhonc, chief compliance officer and portfolio manager for Ashfield Capital Partners. “Since everybody’s situation is different, we must have a full quiver of arrows, including direct access to real estate investments.”
Ashfield Capital Partners works with several real estate sponsors to meet that firm-wide objective. “We’re very judicious about who we work with, and we really try to find excellent real estate sponsors,” Fadrhonc notes. “Once we find them, do the due diligence and have a good experience, we keep going back to them.”
One of those sponsors is Hamilton Zanze (HZ), a San Francisco-based real estate investment company that has more than 20 years of experience acquiring and operating multifamily assets across the United States. Since its founding in 2001, the firm has acquired roughly $5.3 billion in multifamily assets and currently owns and operates 132 properties across 17 states.
“Earning the trust of anyone who is a sphere of influence can be very impactful for firms looking to raise capital,” says HZ’s CEO Kurt Houtkooper. “It amplifies our reach to people we may not have met otherwise.”
Fastest growing channel
Most real estate investment firms that currently work with RIAs contend that they are the fastest growing source of investment capital. Several trillion dollars of retail capital is currently sitting on the sidelines, eager for exposure to commercial real estate without going through an intermediary or direct ownership. Experts estimate that more than 90 percent of that capital is distributed through RIAs that use the three largest custodial platforms: Fidelity, Schwab and TD Ameritrade.
“Because of the democratization of investing, I expect more of our capital will come from RIAs,” says Nitin Chexal, founder and CEO of Palladius Capital Management, an Austin, Texas-based investment management firm that specializes in multifamily and student housing. “Demand from RIA clients in the last few years has meaningfully accelerated, and many of our RIA partners have grown significantly.”
Many real estate sponsors have established entire teams focused exclusively on building and maintaining relationships with RIAs and wealth management firms. Consider Origin Investments: The Chicago-based real estate investment firm has a division within its investor relations group that specifically handles the firm’s RIA relationships. It’s responsible for educating RIAs about real estate and onboarding them to Origin Investments’ platform, as well as for ongoing relationship management.
Origin Investments currently works with more than 50 RIAs, according to co-CEO Michael Episcope. “This happened organically over the last six years as individuals would bring in their RIAs as part of due diligence,” he says. “Once they got to know us, many started recommending us to their other clients.”
RIAs are Origin Investments’ fastest growing channel. Within the next two years, 50 percent of its investors will likely come through investment advisory firms. “In 2020, we decided to build a dedicated arm to service this segment of the market because of how quickly it was growing and its potential,” Episcope notes.
Likewise, Capital Square’s involvement with RIAs is growing. While the real estate investment firm continues to work with broker-dealers to raise money for its funds, RIAs and wealth managers have emerged as a path of growth, according to CEO Louis Rogers.
Capital Square, which specializes in tax-advantaged real estate investments including 1031 exchanges and qualified opportunity zone funds for tax deferral and exclusion, has completed more than $3 billion in transaction volume. It has been recognized by Inc. 5000 as one of the fastest growing companies in the nation for five consecutive years.
“RIAs have become our future,” Rogers says, adding that the firm currently works with roughly 50 wealth management professionals. “That’s not a very large number in absolute terms, but it’s a number that’s growing at a rapid pace.”
An efficient way to raise capital
When it comes to the different methods for successfully raising equity, real estate sponsors say that RIAs are an extremely effective way to raise to do so.
“Our reputation and referrals from existing investors are our most effective tool in raising equity, and our work with RIAs would be close behind that,” says HZ’s Houtkooper.
HZ’s investor base has grown from a few close friends and family to over 1,300 people, almost all of whom come to the firm through referrals, according to Houtkooper. Working with RIAs has come about naturally over the years.
“Our investors have included their advisors in conversations, and HZ has become more well known within the RIA community,” Houtkooper notes. “RIAs appreciate HZ as a fixed-income alternative, appreciate the boutique nature of our firm and are willing to do the extra due diligence to uncover opportunities.”
Once a sponsor receives approval from an RIA, it can yield dozens of clients and tens of millions of dollars in investment capital. “It is far more scalable than finding dozens of individual investors directly,” Episcope says.
However, Episcope is quick to point out that it’s far more difficult to raise money through the RIA channel than it is to raise money from investors directly. “While individuals tend to make quick decisions, it can take months and even years before we successfully convert an RIA lead to a customer,” he notes.
Establishing relationships with RIAs
More often than not, sponsors have to spend several years pursuing an RIA before finally getting an opportunity to work with them. Not only is it a challenge to get an RIA’s attention, but it’s also difficult to find RIAs that don’t already have relationships with other sponsors. And it’s equally challenging to find RIAs that are willing to put in the time and effort to conduct extensive due diligence on sponsors, Houtkooper notes.
Consider this: HZ courted one specific RIA for almost a decade before it made its first investment. The RIA reviewed multiple sets of HZ’s offering documents and met with the HZ team several times before finally giving HZ a chance. Today, the real estate firm and the RIA have a “meaningful” relationship, according to Houtkooper.
Similarly, Los Angeles-based Trion Properties spent eight years pursuing one particular RIA with no success, according to Managing Partner Max Sharkansky. However, the real estate firm, which invests in value-add multifamily along the West Coast, recently learned that the elusive, unattainable RIA planned to invest a large amount of capital with Trion.
While RIAs have historically accounted for 15 to 20 percent of Trion’s investment capital, Sharkansky expects that number to increase to as much as 40 percent in the future, partly because of capital commitment from the above unnamed RIA.
“Because RIAs are known to be a great source of capital, they’re getting God knows how many emails and calls every day,” Sharkansky says. “They’re constantly bombarded by sponsors.”
Fadrhonc admits that sponsors have a very hard time breaking into wealth management firms like Ashfield Capital Partners. “If you just send me an email or leave a voice mail, and you butcher my name, that message gets deleted,” he says. “You’ve got to have a warm lead. It has to come from somebody we know, like and respect who says, ‘Hey, I’ve been working with these guys, and they’re great,’ or ‘You really ought to meet this group’.”
It’s close to impossible for new sponsors without a track record to get the attention of an RIA. Because most RIAs take their fiduciary responsibilities very seriously, they’re not going to feel comfortable advising their clients to invest with sponsors that haven’t proven themselves.
“For a newer sponsor, I would tell them to build up that track record with individual investors—friends and family—and small family offices,” Sharkansky says. “Get some deals on your belt, and then once you have a track record, try to get in the door with some RIAs.”
An alignment of interests
Experts point out that the tax benefits that real estate investments offer, coupled with the long-term, illiquid nature of direct investments, creates an alignment of interest between commercial real estate sponsors and RIAs.
“From a relationship standpoint, we seek out RIAs that think in ‘generational wealth’ time horizons, want the illiquidity premium of real estate and advocate for the tax efficiency of our offerings,” Houtkooper says. “We think of our work as part of a larger financial picture for our investors and welcome the holistic approach when RIAs, tax advisors, estate planners and others are involved.”
Rogers notes that Capital Square appreciates that RIAs are more relationship-driven rather than transactional. “RIAs have a holistic approach to wealth management that fits the investment products that Capital Square sponsors, which tend to focus on providing the best return at the lowest cost and taxes.”
Alexandria, Va.-based Bonaventure chose the RIA channel to distribute its fund because of the fiduciary standards RIAs hold themselves to and how that aligned with the firm’s model, according to Founder and CEO Dwight Dunton. The vertically integrated alternative asset management company owns and operates more than 6,000 apartment units across 26 communities primarily in the Mid-Atlantic and Southeastern regions of the country.
“Bonaventure was born out of a family office, and family offices historically have relied on real estate to provide preservation of capital, current income, and growth potential,” Dunton says. “Due to the benefits real estate provides to portfolios, and the fiduciary standard of RIAs, it was an easy decision to focus on RIA distribution.”
Like many other sponsors, Bonaventure has a team dedicated to capital raising efforts within the RIA channel. While RIAs have different approaches to due diligence, Dunton notes that most “take a long-term ‘buy and hold’ approach, which aligns very closely with Bonaventure’s long-term, value creation mentality.”
He adds that RIAs take an institutional approach to investing for the everyday investor by thoroughly researching the market and extensively screening asset managers.
“In our business, job number one is don’t lose it, and job number two is to make more of it. We don’t invest with anybody that doesn’t have a track record going through a big and extended downturn,” says Fadrhonc. “That’s particularly important for illiquid investments like real estate.”