Travis Smith and his three brothers were on a fishing trip back in 2008 when they decided to form an investment club—or as they dubbed it, “tribe”—that would allow them to invest in private real estate.
“We realized that the math just didn’t add up on how we were going to retire,” says Smith. All four had checked the usual boxes. They had gone to good schools, had good jobs, were making good money and were contributing to their 401ks. But the savings they had in their 401ks were volatile and slow growing. The four saw private real estate investment as a way to not only build wealth, but a way to build generational wealth for their families.
The four formed an LLC, opened a business bank account and began contributing $500 each to that account every month. Atter a year, they had enough to invest in their first commercial real estate syndication deal—a medical office building in Pasadena, Calif. That investing club was the origin of Tribevest, a collaborative, group investment platform that enables friends, family and like-minded people to organize as an investor group, pool money and manage co-owned investments.
In January, Tribevest launched a new “Open Tribes” investment management platform that allows individuals to participate in private placements by providing infrastructure and efficiency for collaborative investing. “What we’re doing is helping people become capital raisers on a small scale,” says Smith, the founder and CEO of Tribevest. Each tribe is typically made up of 10 to 15 people that are pooling their capital to invest in deals, which in most cases are real estate syndications.
Tribevest is among a growing number of investment platforms, asset managers and sponsors that are tapping into a large pool of retail investors. Non-accredited investors in particular–those that don’t meat income or net worth hurdles as defined by the SEC–have had a more challenging time accessing real estate investments outside of the public market.
“We’re seeing a movement from conventional investing from successful professionals who are realizing that in order to build wealth and find financial freedom, they need to invest like the wealthy, and they know that’s in the private market,” says Smith.
Growing pool of retail investors
In another recent launch, crowdfunding firm Neighborhood Ventures introduced its new NV REIT. Previously, participation in Phoenix-based Neighborhood Venture projects had been limited to Arizona residents, while NV REIT is a nationwide offering that is open to both accredited and non-accredited investors with a minimum investment amount of $1,000. NV REIT plans to invest in cash-flowing multifamily assets in the Sun Belt and Mountain states.
Capital raising in the broader real estate market is feeling the effects of market challenges related to higher interest rates, pricing uncertainty and slower economic growth. However, the impact on fundraising is choppy based on the type of vehicle, the individual sponsor or fund manager.
Industry data shows a clear pullback in fundraising to vehicles open to non-accredited investors, such as non-traded REITs, interval funds and BDCs. Investment in non-traded REITs also has been hampered by a surge in redemption requests, with Blackstone taking the brunt of those requests. Excluding a $4 billion investment into Blackstone from the Regents of the University of California, new fundraising to non-traded REITs totaled $596 million in January, the lowest monthly level since 2009, according to data from Robert A. Stanger & Co. Capital flows to interval funds and BDCs also declined notably on a year-over-year basis to $1.4 billion and $543.8 million respectively.
“There’s no doubt that capital markets for real estate, and frankly many other sectors, are a bit dislocated right now. I think that is consistent with what happens when central banks around the world change the rules in very short periods of time,” says Chris A. Milner, head of Investment Management at Cantor Fitzgerald LP. Among its various investment vehicles, Cantor Fitzgerald has two registered products that are available to non-accredited investors, including its non-traded REIT and an interval fund that focuses on infrastructure. However, Milner agrees with the macro trend that the individual retail pool is a bigger focus for entities raising capital, including the large asset management companies.
When some of the big private equity asset management companies, such as KKR and Blackstone, made the transition to become public companies, that was really the beginnings of those management teams understanding what it was like to be a retail capital raising enterprise. That entire side of the capital markets became more familiar and more actively involved with retail investors, notes Milner. “That is likely to persist in the future, because frankly the defined contribution plan market is essentially going away,” he says. The defined benefit plan marketplace is more of a fight for market share. So, the real big growth potential for sources of capital is the retail investor, he adds.
Investing trends are mixed bag
The retail investor market is highly fragmented with investors that run the gamut from DIY to those that are relying on financial advisors. Some of those do-it-yourselfers are gravitating to investment communities. For example, Left Field Investors has grown to a group of like-minded individuals with a network of about 1,250 individual investors. “What’s cool about this is that these retail investors quickly become savvy, because as a community they are engaging in conversations, getting access to and getting pitched by syndicators,” says Smith. Individuals are becoming more educated and savvier by discussing deals, asking questions and doing their due diligence.
Other individuals are relying on financial advisors to provide guidance and access to real estate investments. Most retail investors aren’t in the business of understanding financial products and what’s available. So, they are looking to someone who can assist and guide them. “So, the most important tailwind is a proliferation of financial advisors that have done the work to understand the products. They’ve been exposed to them, and they’re providing access to a broader universe of those clients,” says Milner. Those advisors can introduce investment options to clients beyond just buying the MSCI REIT Index, he adds.
One of the common themes is that these advisors are adopting a continuation of the endowment model. According to Milner, advisors are identifying the fact that alternatives can, when used properly and executed efficiently, increase returns and decrease volatility. Different advisors are adapting that strategy to various degrees, but it is a clear trend driving retail investment into real estate and tapping that pool of retail capital is still in the early days.
Investment trends occurring in the institutional space always “trickles downhill” to financial advisors and retail investors, agrees Raymond Davis, chief strategy officer of Red Oak Capital Holdings. Among its private equity debt funds, Red Oak provides offerings for institutional investors, and it also offers a series of Reg A+ debt funds that are open to non-accredited investors that meet certain minimum income levels, with a minimum investment amount of either $5,000 or $10,000, depending on the fund.
About two years ago, the big institutions started looking at credit strategies backed by hard assets. They were worried about the Fed continuing to raise rates and pricing compression. As a result, institutions saw the safe place to be as the senior position in a loan at 50% to 60% leverage. As Red Oak started to see these trends, they also stepped up marketing and outreach around debt strategies to financial advisors and retail investors. As a provider of short-term fixed-rate loans, the high interest rate environment has actually helped Red Oak, both in demand from borrowers and investors who are interested in higher yielding credit strategies.
“Even if there is a touch of skittishness out there, people recognize that they can’t just leave their money in the bank, otherwise it earns a net negative return,” says Davis. So, there is appetite from retail investors, especially for investments that are lower in the capital stack and offer good risk-adjusted returns relative to other alternatives, he adds.