As institutional multifamily funds continue to scale up – for example, the $1.5-billion acquisition earlier this year of New York City-based Apollo’s acquisition of Salt-Lake City-based Bridge Investment Group – the industry narrative often seems like it is moving towards larger platforms – and deals – exclusively. It raises an important question of whether there is still room for, as well as a competitive advantage with, sub-institutional transactions.
The easy answer is yes. The niche of sub-institutional transactions is a place that registered investment advisors (RIAs) and their clients can find differentiated value – and in partnering with the right platform potentially better mitigate volatility and risk in the sector. In the last article in our four-part series, read on to learn more about what RIAs can expect in partnering with Kingbird in this specialized sector.
Why Sub-Institutional Transactions Matter for RIAs
Mega-platforms typically focus on deals that are larger than $100 million, which is a significant segment of the market. However, the market for transactions that require less than $10 million in equity is highly fragmented.
The key feature of investing in this part of the market is that assets tend to be priced inefficiently relative to larger transactions bid on by bigger funds. This enables partners who may be smaller but possess operator due diligence capabilities, in-place networks and an institutional underwriting lens – like Kingbird – to capitalize on the inefficiency by investing at discounts to intrinsic value. Doing so provides downside risk protection – and bolsters the opportunity for long-term value creation.
For RIAs, we believe such platforms can provide a fiduciary-backed entry point into opportunities that may be overlooked by the larger institutional players – but still meet rigorous underwriting standards.
Smaller real estate operators in the small to middle market also often lack the ability to: 1) fund their own general partner commitments to scale with institutional capital or, 2) simply source capital beyond their local high-net-worth investor base. This limits their ability to grow. Family office platforms like Kingbird can step in and provide strategic capital, helping local operators grow through co-GP, preferred equity, or limited partner investments that capture additional alpha compared to a traditional LP position. Additionally, there may be the opportunity to generate returns both as an LP and as a co-GP in the same investment – positioning investors to mitigate risk where institutional ownership is a natural exit strategy for certain asset types.
For example, Kingbird may participate first as an LP with advantageous terms in a value add project, and, as a local operator scales, might participate through a co-GP position, earning additional fees when the asset is stabilized and sold to a larger institutional investor. Currently, 46% of Kingbird’s investable pipeline consists of co-GP opportunities with projected stabilization at a 7% cap rate.
A Model That Resonates
A key success factor in the sub-institutional transaction space is that – in addition to institutional-level due diligence, underwriting, and asset management – the alignment of all participants remain of institutional caliber. Both RIAs and properly governed family office platforms operate with a fiduciary duty to their clients and as such it should be mirrored in the structuring of the transaction at the investment and asset levels.
For example, Kingbird’s economics are aligned with the success of the transaction or investment vehicle, not on earning fees. Kingbird brings an unusually high level of alignment, with principals investing upwards of 15% of capital alongside RIAs and their clients. With those numbers, they have far more skin in the game than is typical. Just as RIAs serve as fiduciaries to their clients, Kingbird is a fiduciary to its partner RIAs and offers a high-touch model that gives investors direct access to senior leaders.
Additionally, at the transaction level, institutionally-oriented, highly-negotiated terms may allow Kingbird to step in where necessary as an asset manager, or with control rights. When markets shift, that could mean restructuring a property’s financing to protect value in a rising interest rate environment – or stepping in to lead the process to replace a property manager.
As a result of its own experiences investing on behalf both institutional owners of real estate and its own balance sheet, Kingbird’s team has proven adept in challenging market cycles – for example, in bringing creative solutions to refinancings and other capital stack challenges. In properties where underlying fundamentals remain strong, Kingbird can continue to take a long-term view on an asset, while still underwriting a restructuring to an accretive outcome. The advantage is being unconstrained by a sunset period or broader portfolio-level leverage like a larger fund. . For RIAs, this type of flexibility can translate into more resilient outcomes for client portfolios.
Building Long-Term Value
As part of a fourth-generational family office, we at Kingbird Investment Management have seen first-hand how intentionally structured RIA-family office partnerships can build long-term value to all stakeholders and, most important, deliver strong risk-adjusted returns for investors.
Our firm, for example, has developed its research and total return driven investment policy and portfolio construction approach over multiple market cycles and across operating businesses and asset classes.
One advantage of working in the small fund market is being able to build relationships that evolve over time. Family office platforms that aim to amortize the investment it takes to build programmatic pipelines and operator partnerships with the right control, as described above, may often start by testing the capability of the operating partner on their own balance sheet before inviting co-investors. As those operators start to succeed and continue to scale their portfolios, the platform can selectively transition to participate more strategically in the upside across a broader portfolio – and often, sit alongside institutional investors, which provides additional risk mitigation.
Entering at this point in the operator relationship gives RIA and their clients a unique type of downside protected “access.” The strategy provides them with a de-risked position while simultaneously optioning a cycle-resilient pipeline of opportunities. As appropriate, there may be intentional allocations that can be accretive on both sides of a third-party transaction to allow for crystalizing a return of equity. This can occur while still maintaining portfolio exposure to an investment at a different part of the capital structure to further compound value over time.
What This All Means for RIAs
By working with specialist family office platforms, RIAs can offer clients exposure to investments that balance growth potential with careful risk management.
Having a smaller and more agile manager – that understands institutional alignment – allows for faster tactical analysis across geographies, risk profiles, asset classes, and positions in the capital stack when needed. This flexibility, when combined with ongoing asset management and hands-on problem solving, helps RIAs ensure that their clients’ portfolios maintain an uncorrelated – and more consistent risk-adjusted return profile through changing cycles.
Many times, scale is not the only measure of strength. It is the smaller and more targeted strategies that can, in fact, provide better alternatives for alpha and risk-mitigation advantages. For RIAs, partnering with platforms that not only understand, but can also navigate this niche, is a way to deliver long-term client success.
To learn more about how Kingbird can support your alternative investment strategy, please contact ir@kingbird.com.
Disclosures: Advisory services are offered through Kingbird Investment Management (“Kingbird”), an SEC Exempt Reporting Adviser. Information within this may have been provided by third-parties and, while Kingbird believes this information to be accurate, Kingbird has not independently verified such information. Reference to the Securities and Exchange Commission (“SEC”) does not imply that the SEC has endorsed or approved the qualifications of the Firm or its respective representatives to provide any advisory services described here or that the Firm has attained a level of skill or training. Any targets herein reflect analysis regarding potential outcomes, are presented solely for informational purposes and are not guarantees of future performance. Investments in securities are not FDIC insured, are not bank guaranteed and may lose value. Many factors, including unpredictable economic conditions, may cause actual results to vary materially from these targets and there are no assurances that the results will be obtained. Investing in securities involves risks, and there is always the potential of losing money when you invest in securities. Past performance does not guarantee future results, and the likelihood of investment outcomes are hypothetical in nature. Nothing in this article constitutes an offer, solicitation of an offer, or advice to buy or sell securities in jurisdictions where Kingbird is not registered.
The performance information presented herein reflects extracted performance from one or more accounts managed by Kingbird. Extracted performance represents the results of a subset of investments selected from a portfolio (or multiple portfolios) managed by Kingbird. The extracted performance does not represent the performance of the entire portfolio from which the investments were drawn. The extracted performance results presented may differ materially from the performance of the overall portfolio due to differences in cash holdings, allocation decisions, fees, expenses, and other factors. Extracted performance does not reflect the impact of portfolio-level considerations such as overall diversification, risk management, cash flows, or the timing of individual transactions. The results shown are provided for illustrative purposes only and are not necessarily indicative of the performance of any specific client account, composite, or strategy managed by Kingbird. Investors should not assume that the extracted performance results presented would have been achieved by the entire portfolio or by any other account managed by Kingbird. All Kingbird holdings performance is available upon request.