Last week data provider Preqin reported remarkable findings in the comparison of small vs. large real estate funds. It turns out that smaller funds have delivered better returns (5.9% on funds with under $500 million of assets under management, or “AUM”, between 2005-2011) than larger funds (2.3% on funds with over $1 billion AUM). Surprised? Well, here’s another nugget: fund managers with less experience have typically performed better than fund managers with several vintages of funds under their belts.
First a couple of caveats, the “less experience” label is for the organization itself, not necessarily the individuals behind the organizations. Presumably, new fund managers are often founded by successful industry veterans coming from larger organizations. They may bring their savvy and some contacts, but the brand must be built from scratch. Second, although the “big brand” funds appear to have lower returns than smaller funds, the standard deviation of the returns is lower for those big funds (i.e., less volatile). So, while they may have lower returns, the big funds tend to be more steady.
The question we would like to focus on is how technology in particular can be helpful to smaller funds that may not have dedicated resources for attracting institutional capital.
An institutional investor searching for the best returns may not be aware of or may not have access to these smaller real estate funds who stand to deliver the highest returns. Likewise, a real estate investment manager raising a smaller fund for a niche or highly localized strategy may not be able to market itself widely to a global set of potential investors. The same could be said for a new fund manager launching its inaugural fund.
As we’ve stated in this space before, emerging technologies offer a solution for bridging these gaps. Preqin notes: “institutional investors that have the skill and resources to seek out attractive emerging managers have the potential to be rewarded for doing so.” Indeed, and similar to fund managers, investors who are able to maximize their internal due diligence resources by leveraging technology will be the most productive in capturing attractive opportunities.
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