Advantages & Disadvantages of Investing Alongside Institutional Investors

2020 was a tumultuous year for all investors, including institutional investors. But a new study reveals that 87% of institutional investors believe that 2021 will see more or similar amounts of real estate investing than in 2020. In addition, 44% of survey respondents believe that transaction volume will be significantly higher or at record highs, and many remain confident on long-term commercial real estate investment.

According to Josh Herrenkohl, a Senior Managing Director at FTI Consulting, “The survey also revealed that because institutional investors have the capital and resources to play the long-term game and weather the storm created by the pandemic, real estate will continue to be a good way to manage risk and diversify their portfolios.” This is good news for investors involved with sponsors who invest alongside institutional investors.

Key Institutional Investors are Leading the Way

There are hundreds of institutional investment firms, but the key ones in the top 100 control over $20 trillion in assets. The biggest ones are pension funds, and the larger ones in the US include Federal Retirement Thrift, California Public Employees, Mercer, California State Teachers, New York City Retirement, Florida State Board, Russel Investments, and Texas Teachers. All have diversified assets, including real estate.

Factors Influencing Investment Philosophies

What differentiates one institutional investment firm from another is their investment philosophy. Most investment philosophies are based on key elements that include an overall market preference, beliefs in different asset classes, how much risk they’re willing to take, an overall management style and their position on asset diversification. Institutional investors like to have diversification across equity and debt, which helps to balance the overall risk.

Institutional investors collaborate with sponsors like myself, and one thing that I’ve experienced is that they are extremely focused on the sponsor’s experience, and they spend a lot of time and resources vetting sponsors before they invest with them. Having a successful track record in multiple projects is key to working with institutional investors. The amount of money that’s invested is another factor, as institutional investors like to write large checks, often $10M or more.

As a high net worth individual, you can find yourself investing with a sponsor alongside an institutional investor. This type of investment has advantages and disadvantages.

Disadvantages of Investing Alongside Institutional Investors

Disadvantage #1: Preference for Funds