May 25, 2020
The "club deal" is increasingly attracting business owners. Tax benefits, transparency of investments, and networking with co-investors: this investment strategy offers many advantages for savvy investors. This interest is expected to strengthen in the coming weeks in a context favoring distressed sellers.
Still relatively unknown to investors, the "real estate club deal" is nonetheless beginning to attract growing interest from private family offices, business owners, and wealthy private clients. This investment vehicle, which provides access to transactions usually reserved for institutional clients, is truly gaining traction. Long considered a niche, the "club deal" is now becoming more widespread, with investors becoming increasingly sophisticated and keen to invest with purpose.
While its terminology might seem a bit obscure to a newcomer, the "club deal" is based on relatively simple operating principles. As a real estate investment vehicle, it brings together a limited number of investors to acquire and develop an identified real estate complex, comprising one or more assets. It is primarily aimed at savvy investors who want to invest with purpose. Indeed, unlike some types of real estate investments, the investor knows where their investment is going from the moment the "club deal" is formed. This is because funds are only raised once the property is identified and the transaction is secured by the portfolio management company. These funds are then directly invested to finance the acquisition. Thanks to this structure, the management company can therefore focus primarily on sourcing quality real estate assets.
An exclusive circle of investors
So how does one learn about these real estate opportunities and join this very exclusive circle of investors? Primarily designed and offered by real estate asset management companies, these investment vehicles are aimed at savvy investors. Depending on the investor's chosen risk profile, they will be guided towards one of four investment strategies, ranging from the most conservative "Core" and "Core +" to the riskiest "Value Added" and "Opportunistic." Asset managers will prioritize organizing real estate "club deals" with investors who share a similar risk appetite. The objective is to facilitate discussions during the various rounds of meetings. These moments provide opportunities for investors to get to know each other, exchange ideas, and jointly decide on the best strategy for managing the asset portfolio. Acting as a true advisor, the asset manager is there to support and guide them in decision-making. As the creation of this vehicle requires significant responsiveness, it is important for the investor to have already discussed with the selected management company to align on their convictions. Because once the asset is secured, the acquisition financing must be arranged very quickly.
Prior to the acquisition, a company is formed among the various investors, with its own articles of association and a shareholders' agreement. Depending on the investment horizon, the type of company created differs significantly. For an investment over a maximum period of 5 years, the formation of a joint-stock company is generally preferred. This company will be mandatorily dissolved at the end of this 5-year period, primarily upon the sale of the asset. The return (annualized internal rate of return) targeted by management companies can exceed 10%.
For investors with a longer-term investment horizon, a limited partnership (SLP) will instead be created, through which development or even real estate promotion activities will be carried out. Highly attractive for entrepreneurs, this vehicle offers the advantage of being eligible for Article 150-0 B ter, thereby allowing investors to benefit from the contribution-sale regime under certain conditions.
“Value-Added,” a winning strategy in the wake of Covid-19
Under this investment strategy, asset managers will seek out real estate properties where value can be created through significant asset management work. Renovation, rehabilitation, transformation: the goal of this strategy is to reposition the asset in the market and generate a substantial capital gain upon its sale. In parallel, to achieve a leverage effect of up to 70%, debt is contracted with a financial institution.
Similarly, to maximize the return obtained, the selected real estate assets are generally sourced through an "off-market" identification process, involving very little competition. Properties are typically acquired from distressed sellers, which are usually offered at a discount of up to 30%. The economic crisis we are experiencing is also expected to bring forth numerous acquisition opportunities from sellers forced to divest some of their assets. Indeed, the country's long lockdown period will have a significant impact on the real estate market, across all asset classes. All these new investment opportunities are expected to emerge in the coming months and enable agile management companies to structure new "club deals."
This article should in no way be construed as investment advice or a recommendation to buy, sell, or continue to hold an investment.