We recently have had the opportunity to work with investors in their due diligence of proposed real estate investment funds. Investing in a private equity or debt transaction requires an enhanced level of due diligence. Not only must the underlying real estate investment be thoroughly vetted but the ability of the sponsors and their business plan must be considered well. Assessing the risk in a transaction is critical prior to investing. Many of these business plans are non specific, for example, they propose in investing in distressed assets without much specificity with regard to product type, geography, leverage, use of funds, and other considerations. Fund organizers prefer to provide themselves with as much latitude as possible but with this latitude comes a higher degree of risk for the investor. We prefer funds that are very specific in their approach and limit their use of leverage, this of course will generally result in a lower return (lower risk-lower return). When analyzing investments such as these the assumptions of the organizers are of critical importance and the promise of a higher return always entails higher risk (always).
