The Role of Financial Leverage in the Performance of Private Equity Real Estate Funds

Alcock, Jamie; Baum, Andrew; Colley, Nicholas; Steiner, Eva

doi:10.3905/jpm.2013.2013.1.034

Cited by 4 publications

(6 citation statements)

References 10 publications

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“…By extension, their use of gross returns makes a compelling argument for the insufficiency of net returns from noncore investments. Alcock et al (2013) examined the performance of real estate private equity funds, as reported by Property Funds Research for the period 2001-2011. They used (fixed-effects) panel regression models to examine the effects of market conditions and the amount and timing of leverage.…”

Section: Assessing Risk-adjusted Performance-implementationmentioning

confidence: 99%

Real Estate Returns by Strategy: Have Value‐Added and Opportunistic Funds Pulled Their Weight?

Pagliari

2017

Real Estate Economics

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Real estate strategies broadly fall into three categories: core, value‐added and opportunistic. This empirical examination of net returns from these three strategies indicates that, on a risk‐adjusted basis, the value‐added funds have strongly underperformed and the returns from opportunistic funds have weakly underperformed the returns available from core funds. In so concluding, this article departs from standard asset‐pricing models in two important respects: the total risk is used and the cost of borrowing increases as leverage increases. While the first departure has no substantive effect, the second departure lowers the estimate of the underperformance of noncore funds.

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Section: Assessing Risk-adjusted Performance-implementationmentioning

confidence: 99%

Real Estate Returns by Strategy: Have Value‐Added and Opportunistic Funds Pulled Their Weight?

Pagliari

2017

Real Estate Economics

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“…Managerial skill in PERE has received little attention. Alcock et al (2013) study managerial skill in terms of alpha from a regression analysis of PERE returns. They document that most of the PERE returns can be explained by variation in the underlying market return, and that funds overall are unable to deliver significant positive outperformance on the basis of managerial skill.…”

Section: Literaturementioning

confidence: 99%

“…Either of these rationales implicitly assumes that GP firms vary in their ability to lead a fund to success. Such intrinsic ability is often referred to as managerial skill and can manifest itself through a number of outlets, for example, by picking the right markets and investments (Diller and Kaserer 2009;Fuerst and Matysiak 2013;Axelson et al 2009;Anson and Hudson-Wilson 2003;Baum and Farrelly 2009), market timing (Diller and Kaserer 2009;Alcock et al 2013), negotiation skills, ability to source and execute more complex deals (Baum and Farrelly 2009), successfully deploying leverage (Alcock et al 2013) and avoiding losses (Bollen and Pool 2009). Despite the limited empirical evidence on managerial skill in PERE, the expectation that managerial skill affects PERE performance is not unreasonable.…”

Section: Introductionmentioning

confidence: 99%

Managerial Skill and European PERE Fund Performance

Sleptcova

Falkenbach

2020

J Real Estate Finan Econ

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Institutional investors often select private equity real estate (PERE) funds based on the belief that some of the managers possess skill. In this paper, we study skill of PERE general partners (GPs) from two perspectives: performance persistence and limited partner (LP) reinvestment. We first risk-adjust fund returns by controlling for fund characteristics and obtain abnormal returns that are driven by managerial skill. We then use pooled OLS and probit regressions on abnormal returns to show that managerial performance persists in our sample, and that skilled managers continue to deliver winning risk-adjusted performance, while for mediocre managers performance does not persist in terms of neither performance correlation nor probability of repeating performance. We also provide evidence that LP reinvestment can serve as a signal of skill, as reinvested funds perform better than non-reinvested ones. This positive effect of reinvestment also applies to the predecessor loser and non-winner funds, suggesting that poor performance does not always indicate the lack of skill, but can be a result of random events.

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“…In part, this results from problems in accessing robust data with sufficient time series. The growth of private real estate funds as an investment vehicle is a comparatively new phenomenon (see Alcock et al, 2013); data are proprietary and difficult to obtain and the returns delivered to investors result both from the performance of the real estate assets held and the capital structure of the fund.…”

Section: Prior Researchmentioning

confidence: 99%

“…They find that portfolio structure (in particular lease structure) has some significance in predicting the probability of positive alpha. Alcock, Baum, Colley and Steiner (2013) examine fund returns (including capital structure effects) in a fixed effect panel framework to test whether managers can time leverage decisions. Their market model suggests persistent negative alpha (attributed to the impact of management fees) and no evidence of leverage timing ability, with increased risk associated with underperformance in down markets but not contributing significant gains in rising markets.…”

Section: Prior Researchmentioning

confidence: 99%

How Active Is Your Real Estate Fund Manager?

Cremers¹,

Lizieri²

2015

JAI

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Using a holdings-based measure of active management termed the 'Segment Active Share', the paper documents that commercial real estate portfolios that are more active -i.e., have segment weights which are least like those of the index -have outperformed. Employing proprietary IPD data for 256 U.K. real estate funds over 2002-2011, we find that funds with high Segment Active Share on average outperformed the real estate market by 1.9% per year. These funds do not seem to take increased risk and their outperformance cannot be explained by fund size alone, though on average they are smaller funds.

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The Role of Financial Leverage in the Performance of Private Equity Real Estate Funds

Cited by 4 publications

References 10 publications

Real Estate Returns by Strategy: Have Value‐Added and Opportunistic Funds Pulled Their Weight?

Real Estate Returns by Strategy: Have Value‐Added and Opportunistic Funds Pulled Their Weight?

Managerial Skill and European PERE Fund Performance

How Active Is Your Real Estate Fund Manager?

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