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BUSINESS
OF MEDICINE

The Irresistible Rise

of Private Equity

Real Estate

Private equity real estate can deliver a tangible
financial return — and preserve capital —
even in today’s yield-starved market.

By Ari Rastegar

For high net worth investors, these are extraordinary times impacted sets over a seven to ten-year period. Sometimes the investment pe-
by disruptive changes to the regulatory and political landscape. Today, riod is even shorter. In structure and operations, it mirrors tradi-
CEOs, doctors, attorneys, and other sophisticated investors are ex- tional private equity funds whether they be in the oil and gas
ploring new ways to preserve and grow their capital, including adjusting industry, technology and venture industry, or other asset classes.
their asset allocations and making strategic moves into alternative in- The scale ranges from smaller end funds of US$10 million to $25
vestments. In many cases this means getting out of hedge funds and million to the tens of billions of dollars where only institutional in-
into private equity. In this brave new world, I believe that private equity vestors like endowments, superannuation funds, pension plans, etc.,
real estate is worth strong consideration. will participate. The proceeds are then managed by a fund and con-
Private equity real estate can deliver a tangible financial return — trolled by the general partner (GP), which identifies and executes
and preserve capital — even in today’s yield-starved market. If all investment opportunities.
else goes wrong, and barring war or a major global disaster, property The GP is compensated through two primary components. First,
will continue to exist long after fiat paper money and other tradi- is an ongoing management fee calculated as a percentage of assets
tional investments have imploded or even vanished (anyone for under management. The management fee is a flat rate and typically
Lehman Brothers, The Royal Bank of Scotland, or Lloyds Bank). can be 2 percent of the total assets under management. In addition,
The first step in defining a concept such as private equity real es- the GP is usually entitled to a share of the fund profits only if the
tate investment, that might be unfamiliar to some, can often be to investors achieve a minimum level of investment return, also known
explain what it is not. Private equity real estate investment is not to as the hurdle rate. This fee is known as carried interest and is calcu-
be confused with investing in a publicly traded, or non-traded, REIT lated as a percentage of the overall net profits, such as 20 percent.
(real estate investment trust) vehicle, the most commonly used real The concept of carried interest is to provide additional incentive
estate investment product. for the GP to maximize the total fund return.
Typically, private equity real estate investment refers to pooled Many of the world’s largest investment names, including Black-
funds that are professionally managed and will invest in multiple as- stone, Starwood Capital, KKR, The Carlyle Group, Oaktree Capital

22 San Antonio Medicine • April 2018