The Rise of the Hybrid Alternative Investment: Real Estate Syndications Are Benefiting
Written by Desireé Duffy
How agile are you when it comes to your investment strategy? Are you open to alternative investments?
As investors become more affluent, they start to allocate more of their capital to alternative investments like real estate and private investments. Accredited investors, including high net worth individuals (“HNWIs”), with investable assets of at least $3 million, allocate a higher percentage of their assets toward alternative assets the more wealth they amass.
Private real estate groups, (i.e., real estate syndications), are currently seeing an influx of capital from affluent investors. Under Regulation D, real estate partnerships and syndications are raising millions every year. The latest numbers from the Securities and Exchange Commission are from 2014.
In 2014, there were 33,429 Regulation D offerings reported on Form D filings; accounting for more than $1.3 trillion raised.
Issuers in non-financial industries reported raising $133 billion during 2014. Among financial issuers, hedge funds reported raising $388 billion and private equity funds reported $316 billion, while financial issuers that are not pooled investment funds reported $375 billion.
Rule 506 accounts for 99% of the amounts reported sold through Regulation D. This includes 97% of capital raised below the Rule 504 or Rule 505 offering limit thresholds, suggesting that issuers continue to value the preemption of state securities laws provided for offerings conducted pursuant to Rule 506.
Since the effectiveness of Rule 506(c) on September 23, 2013 that eliminated the ban on advertising, only a small proportion, (2%; $33 billion), of the capital raised in Regulation D offerings was raised in offerings conducted pursuant to Rule 506(c).
Consistent with the original intent of Regulation D to target the capital formation needs of small business, the median offer size of non-financial issuers is less than $2 million.
Approximately 301,000 investors participated in Regulation D offerings during 2014. A large majority of these investors participated in offerings by non-financial issuers. Non-accredited investors were present in only 10% of Regulation D offerings.
A 2017 Global Pension Assets Study showed that the average HNWI, with assets of $10 million or less, devotes approximately 22 percent of total allocated assets to alternative investments, while the average HNWI, with assets that exceed $30 million, devotes approximately 46 percent of total allocated assets to alternative investments.
The attraction to alternative investments by HNWIs reflects a broader shift among all investors towards alternative investments. With memories of the 2008 crash and an exceptionally long bull market, many investors are turning to alternatives, like real estate, to protect them from the next crash. As proof, in the same study listed previously, between 1997 and 2016, the reallocation of investable assets among all investors from stocks and bonds, to real estate and other alternative investments increased from 4% to 24%.
Real estate firms seeking private capital from $1MM to $30MM in property-specific syndications and real estate funds are found to be successfully raising capital more efficiently since the JOBS Act. Before the implementation of the new Regulation D 506(c), real estate partnerships were exclusively shared within a small group of well-connected investors.
Under 506(c), more real estate firms are now finding it easier to attract new investors by advertising online and offline.
“I’m seeing more clients attract HNWIs for their real estate syndications,” notes Mauricio Rauld, Esq. of Premier Law Group, a real estate syndication law firm. “Under the new regulations. It’s an exciting time to raise capital for real estate acquisitions and developments.”