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Despite complex market conditions and greater caution among investors, deals are still flowing. However, raising equity for new projects has become all the more challenging for General Partners (GPs) of CRE funds/syndicates.
According to PWC’s Emerging Trends in Real Estate 2023 report:
As one head of an investment firm told PWC:
“Instead of seven or 10 competing offers for sale, there’s now two or three”.
Therefore, to capture the attention of Limited Partners (LPs), a stellar fundraising process is crucial. And the difference between a successful fundraising process and a dud is in knowing the most commonly overlooked mistakes and how to circumvent them.
Keep reading this guide to discover the most commonly overlooked pitfalls when raising capital.
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With steeper energy prices and government-enforced ESG disclosure requirements, investors increasingly prioritize ESG in their commercial real estate project criteria.
Analysis by Mckinsey reiterates this:
“Acquiring assets strategically and adding value through decarbonization improvements strengthens portfolios. The ability to generate returns while meeting climate objectives can also help real estate owners access more capital on better terms”.
It’s no surprise, then, that 65% of U.S investors reported an intensification in their focus on ESG in 2022, according to a 2023 global report from CBRE, which surveyed over 500 commercial real estate professionals worldwide:
“Investors and occupiers are most often willing to pay a premium for buildings with on-site renewable energy generation and/or smart technology to monitor and adjust energy usage,” the report adds.
That’s why you should put your ESG value front and center early in your fundraising process.
According to CBRE’s report, the leading ESG concerns for investors are:
Another important consideration is reducing exposure to funds that operate in controversial economic sectors – a product of their risk aversion and focus on preserving asset value.
Incorporate information highlighting your project’s alignment with ESG priorities in your brochures and general communication with potential investors to boost your fundraising efforts.
Fueled by the rise of prop-tech vendors, the savviest CRE funds are leveraging advanced analytics to unearth real estate gems and stand out to investors.
Indeed, 32% of respondents in Altus’s State of Data Science in CRE report, which was carried out in the second half of 2022, cited “improving fundraising and appeal to existing and prospective investors” as a primary reason for investing in data science/analytics capabilities.
This isn’t without reason. As per McKinsey, real estate players using nontraditional data and advanced analytics to value properties and negotiate leases “can often move more quickly and confidently, winning more deals and paying the right price.”
McKinsey shared an interesting example of this in action: They built an analytical model for a U.S. city that showed proximity to a gas station negatively impacted the growth of rents, but proximity to a high number of five-star Yelp-reviewed restaurants had a strong positive effect on it.
If you can unearth data like this, which strengthens your project’s business case, you’ll have far greater appeal to investors and stand out from the competition in the knowledge-based value you provide them.
In an environment where most funds rely solely on traditional data, using advanced analytics to source better deals is a surefire way to gain a competitive edge over companies that rely exclusively on traditional data – and build a moat for your fund.
In practical terms, you can either outsource this process to an external prop-tech vendor, such as Reonomy or Real Capital Analytics, which will save you time and money compared to the alternative: building an internal, owned, and operated tech solution.
For that, you’d need to hire several full-time engineers and a data scientist, which is a considerable financial cost and very time-consuming.
However, the primary benefit of building in-house tech is having full ownership and customization of your data analytics. Ultimately this decision comes down to your budget, deal volume, deal complexity, and business needs.
Successful fundraising does not happen in a vacuum – it’s often the product of long-term, compounding efforts that precede the birth of a new project. A vital facet of this is your investor relations in previous deals.
To cultivate repeat investments from your existing investors, maintaining healthy relations is a must.
However, syndicates – especially those with dozens of projects on the market and even more investors – run into difficulties maintaining the level of communication required.
For instance, if an LP needs to request documents actively, follow up to receive updates, and depend on their GP for information, it’ll likely strain the relationship and reduce the likelihood of them subscribing to future projects.
It’s not for lack of trying on the GP’s end – typically, this pitfall is due to a lack of resources to carry out the manual operations at scale.
Luckily, the solution can be found in technology – specifically investor relationship management platforms and online investor portals – to streamline operations and communication with investors.
Foster long-term relationships with LPs by leveraging investor relationship management software on your end and a convenient Investor Portal on their end as part of one solution.
The CRM enables you to manage investor relations more efficiently without needing to dedicate more staff resources. At the same time, the Investor Portal lets your LPs access their portfolios, see deal information, download reports, and communicate at any time from anywhere.
Other ideas for fostering investor relations include:
Leveraging these tactics will help ensure you have multiple touch points throughout the year with previous investors, so you stay top of mind and in an excellent position to attract repeat investments.
Private equity is just one option for raising your capital stack, but don’t forget to research which subsidies or institutional funding might be available to you as well.
An excellent case in point of the sometimes unexpected sources of funding you can get was provided by Paul Thompson on Agora’s Deal Makers podcast.
The real estate investor shared how he discovered a creek running through a 15-acre plot of land he was developing in Texas.
Due to the vast amount of water running through the creek, the cost to build a bridge was significantly higher than anticipated, making any prospect of profitability highly unlikely.
Needing to find a way to increase the density of the development to offset this cost, Paul stumbled upon what’s known as a ‘package plant’ in Texas, in essence, an on-site water waste removal system.
He learned that he could get a significant subsidy from the local city authorities by building this system into his development. Without this, the project would never have been profitable.
Research grant and subsidy possibilities in the city you’re operating in – especially if you can pitch valuable ESG initiatives.
An excellent place to start is the official websites of state government agencies responsible for economic development, housing, energy, or environmental programs.
These websites often provide information on available subsidies, eligibility criteria, and application processes. Funding databases such as Grants.gov also give information on state-level grants.
It’s an easy misconception to assume the fundraising process begins once you identify a new real estate project and actively start outreach to investors. In reality, the success of new fundraising efforts largely relies on what’s come before.
Building a strong brand to leverage it during fundraising is an important yet often underestimated strategy for CRE funds to increase their visibility and trust, especially with the U.S. market in a downturn.
There are many tactics to boost your branding: a professional website – with a well-designed interface, comprehensive project information, and case studies highlighting past successes – is highly recommended.
Additionally, consider writing thought-leadership articles for industry publications. These demonstrate expertise, increase visibility, and strengthen your reputation among investors – both old and new. So does participating in public speaking engagements, hosting webinars, and networking at industry events.
Brand building requires long-term effort and investment, but the compounding effect of these initiatives has significant rewards when the time comes to raise capital for new developments.
Despite the economic downturn, investment demand for CRE is still healthy, per PWC’s 2023 report.
Investors are simply becoming more selective and cautious with their money. GPs, therefore, need to focus on standing out from competing funds and minimizing uncertainty for LPs during the fundraising process.
To that end, top priorities should be investing in advanced data analytics and emphasizing ESG initiatives.
Cultivating good relations with existing investors by leveraging software like Agora, hosting annual events, and investing in brand marketing is also crucial.
Finally, keep the Hidden Creek anecdote in mind as a reminder of the alternative funding sources out there to build your capital stack.
Ready to level up your CRE fundraising and investor relations?
Asaf is Agora’s Head of Marketing and a growth expert providing consulting services to tech startups and VCs. Asaf is also the host of The Deal Makers Podcast, where he hosts top CRE talents for conversations where they share their success stories and industry insights.