Your road map to launching a real estate fund: From formation to closing

ARTICLE | February 29, 2024

Authored by RSM US LLP

To successfully create and manage a real estate fund, you need a solid framework and team to attract potential investors.

It is a complex, multistep process that requires intentionality, processes and systems before the first round of fundraising kicks off. RSM US LLP's guide addresses the essential steps that emerging fund managers must prioritize, encompassing aspects such as fund structure, investment strategy, capital raising, corporate governance, and more.

Explore five key steps when launching a real estate fund

The pillars of building a robust foundation and flexible strategy

Launching a new fund allows emerging managers to market and rally a group of potential investors. The first step is to build a robust foundation, including crafting a memorable, well-written private placement memorandum (PPM). Your PPM should highlight the fund’s strategy and competitive advantage. As you execute your strategy, monitor and reevaluate it to ensure it’s relevant and still aligns with what you presented to your investors. Whether you are launching your very first fund or preparing for your third, listen to the market and be flexible with capital deployment and exit plans to adapt to the evolving market conditions.

Select your fund structure and learn about your investor base

Funds have two primary considerations regarding structure: management fee and carried interest. The management fee, typically a percentage of capital committed or invested, runs about 1.5%. The carried interest is received at the back end of the fund’s life as assets are sold. Learn the characteristics of your investor base, especially their tax situation. If you’re targeting tax-exempt investors, they probably are less interested in tax credits and incentives. If you target high net worth investors, look for opportunities to lower their tax liability, such as accelerated depreciation, low-income housing credits or sustainability credits.

Build momentum and demonstrate your expertise in sourcing winning opportunities 

The current environment is an excellent chance for emerging fund managers to showcase their resilience even in an uncertain market. Typically, new managers conduct more individual deal-by-deal agreements to build their track record and then move to fund-level investment strategies. If you have unique insight into specific markets, highlight this core strength in your pitch deck. Scott Helberg, real estate tax partner at RSM, says, “More limited partners are open to investing in second-tier and third-tier emerging real estate markets (i.e., Nashville and Austin).” Investors seek experts with deep knowledge of particular sectors.

Recruit professionals to form an unstoppable team

A crucial aspect of building an institutional-grade infrastructure is hiring the right advisors with experience working with your specific fund structure and strategy. Key team members may include a fund administrator, attorney, accounting firm, internal compliance team and IT consultant. The fund administrator you hire should have the right skills, tools and knowledge to help you navigate the portfolio valuation process and provide objective guidance. Having outside perspectives helps to mitigate bias and allows you to brainstorm with a professional in the industry.

The overlooked benefits of having strong corporate governance and transparency

Corporate governance aims to ensure all stakeholders’ interests are balanced and fair among investors, employees, tenants and the community. One way to measure corporate governance is by incorporating environmental, social and governance (ESG) principles into your fund strategy. Helberg says, “As the regulatory environment continues to focus on ESG, people in the real estate industry must adjust. California recently released rules that could require further reporting.” Also, managers looking to raise capital abroad, particularly in Europe, need time and resources already dedicated to ESG even to be considered. A risk management framework, access to compliance solutions and remaining current on compliance rules are increasingly important.

Work in progress: Unlocking the value of D&I in corporate governance

Some investors are willing to walk away from private companies that lag in diversity and inclusion (D&I) initiatives which is a subset of ESG. Private equity companies should consider integrating D&I priorities into their firm’s policy as part of corporate governance. Both D&I and ESG can help grow a firm’s competitiveness in the market, improve its human capital and unlock opportunities for increased revenue and innovation.

Stay up-to-date on market trends 

When structuring your fund and considering your carried interest, be aware of current market conditions. If investors can get 5% or 6% in a money market account, they will be less interested in investing with a fund manager who starts earning a 7% to 8% rate of return. Consider what is fair in terms of how you can achieve your return because that will help build trust and support with your potential investors. Often, investors will require emerging managers to invest their capital into the fund to show they’re fully focused on the fund's performance and not just earning a management fee; commitment is critical.

The takeaway

Today’s evolving business landscape presents challenges and opportunities for emerging fund managers. The most significant determinants of success are building relationships with investors, selecting a profitable fund structure and strategy, marketing effectively, remaining flexible, and building a solid team. These principles should steer you in the right direction as you grow and graduate from an emerging to an established fund manager.