Real Estate Private Equity: The Case of U.S. Unlisted REITs

Abstract

Purpose - The purpose of this paper is to demonstrate how fixed-share prices, as a structural flaw in private equity funds targeted to small-unit investors, economically disadvantages those investors in favor of sponsors. Design/methodology/approach - The theoretical model incorporates fixed share prices with continuous investment opportunity and evaluates the wealth transfer from long-term investors to marketing affiliates and soliciting dealers in the form of fees paid on the sale of shares to follow-on investors. Findings - This result holds in the presence of high-payout dividend policy that attempts to compensate for wealth transfer. Research limitations/implications - Should share prices be marked-to-market using real estate appraisals or another method, the unlisted REIT and related offerings, such as tenant-in-common funds, will be profitable for sponsors without economically disadvantaging long-term investors. Practical implications - The findings from this research are useful to fund sponsors who design real estate investment products for small-unit investors. These products may retain the advantageous characteristics of existing products while eliminating the disadvantageous features. Originality/value - This is the first academic research on private equity capital raised from small-unit investors.