Marketing Investment Returns of a Real Estate Fund to Potential Investors

By Philip DeRosa  |  November 17, 2020

Marketing Investment Returns of a Real Estate Fund to Potential Investors

Given the current economic conditions, this is not the easiest time for investment advisors or real estate entities to raise capital. However, there is always investor interest for the right opportunities. In this economic climate, savvy investors may require more intel in order to decide whether to invest their capital. To this extent, if a real estate entity or fund is able to take some of the uncertainty out of the investment process, they will have a competitive advantage. One manner in which they can accomplish this goal is through the strategic marketing of their investment returns to potential investors.

Real estate investment managers continue to focus on building a fully integrated investment platform covering all functions from acquisition to construction, asset management and investment management. As they transition from engaging in real estate investments on a deal-by-deal basis—with capital needing to be raised from other managers, institutions or private wealth through their personal networks to an investment fund with institutional investors—the issue arises as to how to present a track record that can pass institutional investor due diligence. The ability to accurately portray the results achieved with any pre-fund investments can be accomplished by working with an experienced professional to provide investment performance information and an independent verification report, both of which can be critical to raising institutional investor capital.

Investment Performance Information

In addition to the operating due diligence of the investment manager and their infrastructure, typical investment due diligence focuses on strategy as well as relative and absolute portfolio performance and returns. Two key pieces of investment performance information relevant to institutional investors are:

  1. Return on invested capital, typically measured by internal rate of return (IRR), and
  2. The multiple of equity returned to investors, calculated as cash returned to investors divided by equity cash invested.

The process of marketing investment performance information to potential investors begins with obtaining and organizing data related to pre-fund investments. This includes acquisition costs, expenditures for capital improvements incurred over the life of the investment, equity and debt financing details, refinancing data, data relating to the sale of the investments, and the amounts returned to investors. Typically, such information goes back several years in order to calculate accurate performance and return information. Before presenting past returns to potential investors, ask yourself if these investment returns have been verified by a credible independent source and if they could survive due diligence by sophisticated investors.

Independent Verification Report

A schedule or statement of performance statistics information typically includes details of all pre-fund investments, such as the property address, acquisition date, purchase price, amount of equity and debt used to finance the property, sale date, sale price, cash returned to investors, and the resulting IRR and equity multiple. The performance schedule or statement is typically accompanied by a report provided by an independent accountant. The report can take one of the following forms:

  1. Report on performance results calculated and presented in compliance with Global Investment Performance Standards (GIPS): This is an independent accountant’s verification report that provides an opinion that the investment manager has complied with all the composite construction requirements of the GIPS and that such investment manager’s policies and procedures are designed to calculate and present performance results in compliance with the GIPS for the period such information is presented. The responsibility for designing and implementing policies and procedures designed to calculate and present performance information in accordance with GIPS rests with the investment manager and usually requires preparation and a full understanding of the robust GIPS framework.

  2. Attest Verification Report: Investment managers who may not have implemented the GIPS framework may engage independent accountants to provide an opinion on the performance information presented. Such a report is accompanied by footnotes that provide information to the reader about the basis of calculation of the investment returns.

  3. Agreed Upon Procedures: Agreed upon procedures (AUP) are decided by the investment manager and the independent accountant and can be customized based on the information available and specific circumstances of the manager. The independent accountant issues a report presenting the procedures performed and related findings. An AUP report provides certain flexibility in designing and customizing procedures. However, it is important to note that this type of report provides no level of assurance and is restricted to users who agree to the sufficiency of the procedures.

Now more than ever, having the right relationship with investors in place prior to having to raise capital is essential. In the context of COVID 19, there is even more reason to focus on investors that you already know and who are familiar with your business, and to employ smart marketing of your past successes. The above-mentioned investment performance information and independent verification reports are one way to achieve the goal of providing potential investors with the information they need in order to make important decisions. The type of report or optimal solution for marketing your returns is based on the facts and circumstances of each particular situation. As such, it is always best practice to consult with a trusted business advisor who can help provide a full understanding of the intricacies in this area.


About Philip DeRosa

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Philip DeRosa, CPA, is a Partner in the Financial Services Practice at Marks Paneth LLP. To this role, he brings more than 20 years of experience advising clients in the alternative investments industry and financial services sector. Philip specializes in providing accounting, audit and advisory services to a range of financial institutions, including private equity firms and hedge funds, as well as broker-dealers and investment advisors. He frequently assists his investment advisor clients with the... READ MORE +


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