An outlook of the private equity market


Movers & Shakers: Dome Equities Zeroes In On Multifamily Rentals

Private equity has been booming for the past few years, but record distributions back to investors have left many LPs with cash to burn. In this environment, private equity real estate funds and other real estate investments are becoming more popular.

Institutions, family offices and individual investors alike are looking for income generating investments and real estate can be one option. New York-based Dome Equities, a $1.27 billion private equity real estate firm is making a big bet on multi-family properties. Construction of multi-family units has been spotty this year, a recent Commerce Department report showed pemits for the segment unexpectedly dropped in September. But permit numbers can vary month-to-month and some analysts expect numbers to start going up again in the fourth quarter.

“One of the dislocation points in the market is that the supply side is not delivering enough rental units so there is scarcity, which impacts rental prices,” says Eric Jones, CIO at Dome Equities. He says that a combination of demographic factors are likely to keep demand for multifamily units strong even if there are episodic drops in permits for new buildings. Why is that? “We’ve seen that the group of people who are primarily renters has grown significantly since 2008 and we expect that trend to continue,” Jones says. “Millennials are buying homes much later in the life if they are buying them at all. Others have discovered that home ownership doesn’t always work out.”

Millennials have also been flocking to cities in favor of a lifestyle less dependent on long commutes that are common to the suburbs. Cities often hold better job prospects and other benefits that appeal to this age group. As a result, Jones says, cities like Atlanta, Denver, Nashville, and other mid-sized cities are having to ramp up production of multifamily rental units considerably in order to meet increased demand. Jones says occupancy rates are up nationwide which can mean higher rental prices – a boon for investors in properties.

[drizzle]

“We see this as a trend that will continue for at least the next five years,” he adds. Dome’s strategy for finding investable properties centers on these growing markets. Jones and his team rely on financial models that rank local risks against local demographics in order to find the strongest targets. Unlike developers that only want to start fresh, Dome will also invest in properties that need updating or repositioning . The investment team then engages a partner network to update those buildings and make them available as rental properties.

As an example of its turnaround strategy, earlier this month, Dome acquired Vista Pointe, an institutional grade apartment community located in the Valley Ranch master-planned community of Irving, Texas.The community was built in 1996 and consists of one, two, and three bedroom units. Dome plans to update the 20-year-old apartments with new interiors and fixtures and will work with a Dallas-headquartered multifamily operator to manage the property.

“Irving is a diverse, strategically located city in an above average growth metropolitan area. Managerial and professional service growth are leading this economy on the back of a number of major corporate relocations,” Jones says by way of explaining the deal. “A high concentration of corporate headquarters, technology businesses, banking, distribution infrastructure, and above average population growth are leading sectors longer term.”

For properties like Vista Pointe, Dome’s average holding period is 3-years while the building is updated. The modest holding period makes for a relatively dynamic portfolio compared to other private equity strategies. Looking forward, Jones says he expects to see this opportunity set remain strong, potentially expanding to more mid-sized cities as more people opt to become lifelong renters.

Data Snapshot: LPs Increase Allocations to PE In Latin America

Continuing with our LatAm spotlight – LPs in a recent Latin America Venture Capital Association (LAVCA) study said that they plan to increase their target allocations to private equity and venture capital in the region. Over two-thirds of Latin American LPs and about half of international LPs are planning to increase their target allocations to PE and overall alternative assets in the next 12 months. The LP study was completed by LAVCA and Cambridge Associates.

44 percent of Latin American LPs also anticipate increasing exposure to real estate and private debt. What’s the reason? According to investors, entry valuations and deal flow appear more attractive in Latin America than in other emerging markets. Investors also say that the macroeconomic picture across Latin America is more attractive than other emerging markets which have less diversified economies.

But, not everything is rosy when it comes to the region. LPs are concerned about currency volatility and political risks – both of which have already been exhibited in countries like Argentina, Brazil, and Venezuela.

To get around pockets of risk, pan-regional funds are still the most popular vehicles among LPs that want Latin America exposures. Nearly 80% of international LPs and over half of Latin American investors expect to access Latin American PE via pan-regional funds in the next three years, according to the study. Investors are also showing a preference for buyout and growth capital strategies. The graph below highlights sector exposures that investors are interested in –

Private Equity

Private Equity Equity Firms Distribute Record $443 Billion

According to new data from Preqin, private equity has completed its third year of record distributions to investors. The industry gave back $443 billion to investors over the report period, marking a slight increase from the $424 billion they distributed in 2014. This is compounded by the falling level of investor capital that fund managers called upon through the year, which fell from $265 billion in 2014 to $226 billion in 2015. Overall, the total net cash flow for the private equity investors was a record $217 billion, accounting for the majority of the combined $335 billion in net capital flowing to investors across the private capital industry.

However, the lower levels of capital called up from investors has spurred the total level of capital waiting to be deployed by fund managers to new record highs. As of the end of 2015, the private equity industry held a total of $2.41trillion in assets, of which $1.66 trillion was the unrealized value of investments still held by fund managers, and $757 billion was dry powder. As of the end of Q3 2016 however, the total dry powder in the industry has risen sharply to $839 billion, far above any level previously seen.

Private Equity

Article by Bailey McCann, Opalesque

See the full PDF below.

[/drizzle]