Funds also consider REPE as a vital investment channel. Take Blackstone as an example, Blackstone’s AUM in Real Estate Private Equity is $167 Bn, only after Private Equity, with $184 Bn AUM (Source: Blackstone’s website). Apollo and Carlyle’s REPE AUM is also half of their total PE’s AUM. That is why the career path and how to get into REPE also get the attention of people who are eyeing on Private Equity in general.
1. What is Real Estate Private Equity (REPE)?
1.1 Types of Strategies
Depending on the stage of that property, REPE defines their own investing strategies, which leads to varied levels of risk involving and potential return.
|Targeted assets||Stabilized Assets||Renovation-needed assets||Redevelopment-needed assets|
(i.e: office space, retail, multifamily units)
(i.e: office space, retail, multifamily units)
|Badly managed and/or vacant properties|
No specific actions
Improvements, releasing or operational change maybe needed
|Significant improvement are required|
|Leverage involved (*)||
More required leverage than “core” strategy
|A lot of leverage|
|Risk vs return (*)||
Low risk – low return. Annual returns are normally from 6-8%
Riskier than “core” but also higher, normal annual returns are from 8-10%
|High risk – high return. Annual returns could be higher than 10%|
(*) Note: comparison among 3 strategies. Regarding REPE’s return, although Core strategies offer the lowest annual return among 3 options, it still provides a high level of income and price increase. 30-year US Treasuries offer only 1.4% yield.
1.2 How does a REPE firm work?
Similar to a normal PE firm, Real Estate Private Equity also raises funds from Limited partners, such as pensions funds, endowments or high net worth individuals to invest in a portfolio of properties.
Time span for an investment in REPE is usually from 5 to 7 years; sometimes, it could be up to 10 – 12 years. The whole process will start with a 2 year investment period when the REPE firm acquires a property. The next 3-5 year period is called “holding period” when the acquired asset is carried out. Finally, the firm exits by selling the asset.
The fee structure does not vary much from a normal PE shop. The firm will charge a certain percentage for the management fee and carry interest after exiting that property.
REPE, like other PE firms, recruits people not only with Investment Banking background but also with Real Estate backgrounds. Therefore, in the upcoming parts, we will do 2 comparisons: (1) among Real Estate shops, and (2) between Real Estate Private Equity and Real Estate Investment Bank.
1.3 Real Estate Private Equity (REPE), Real Estate Investment Trusts (REITs), and Real Estate Operating Company (REOC)
Not only REPEs invest in Real Estate; there are other firm types that also put investors’ money into properties, such as Real Estate Investment Trust (REIT) and Real Estate Operating Company (REOC)
In the next part, to give you the big picture about those 3 concepts, we will quickly go through definitions, then compare them in different aspects.
REITs is more like a mutual fund for Real Estate. REITs’ fund is contributed by a pool of hundreds or thousands of individual investors. Their portfolio includes mostly commercial real estate and the common practice is not to resell but to develop and operate properties in the portfolio.
REOC also invests in Real Estate but earnings will be reinvested in the portfolio, not distributed among shareholders.
1.3.1 Comparison among 3 types of firms
|Investors||Accredited investors, i.e: pension funds, endowments and high net worth individuals||Non-accredited individual investors||Mixed profile|
|How does the firm manage acquired properties?||Acquire, operate and/or develop and exit.||
Develop and operate properties. Cash flow is created via rent or leases
Selling is not the core business
Act like a management agency for acquired properties (i.e: charge monthly fee)
REOCs have more flexibility than REITs to increase the value of the assets to sell.
|Targeted portfolio||Mostly commercial real estate||Both commercial and residential real estate||Both commercial and residential real estate|
|Private Company or Public company||Private company||
Many REITs can be traded in open market
REOC can be traded in open market
|Liquidity||Low liquidity because of long timespan, from 5-7 years||High liquidity as asset can be traded on SEC||Still high liquidly but not as much as REIT as REIT is more popular|
|How is return splitted among shareholders?||Return is distributed among LPs||Distribute at least 90% of net income among shareholders. Only 10% left is invested back in the properties.||Returns can be invested in current portfolio|
|Regulation||Don’t have to comply to as many regulations as REIT||
Investment portfolio is tied with strict regulation:
|Don’t have to comply to as many regulations as REIT|
Carried interest helps to create tax advantages: As assets are held for >1 year, it is taxed as capital gain, which enjoys 0, 15% or 20% tax rate.
(vs Normal income tax varies from 10% – 37%)
|No corporate tax as 90% of net income must be passed to shareholders.||No tax advantage as REIT’s|
1.3.2 Real Estate Private Equity (REPE) vs. Real Estate Investment Banking (REIB)
We wrote about Real Estate Investment Banking with all details about the work and career path. Here I will focus more on highlighting distinctions between two fields.
The line between REPE and REIB, the same as PE vs IB, is on each firm’s role in the investment: REIB plays as an advisor and helps source capital by connecting investors and developers. A lot of REITs hire REIB for their projects. Meanwhile, REPE invests directly in its own projects: from acquiring, developing to selling the assets.
Due to the nature of work, REPE will require candidates with the “sourcing” skill besides financial modelings, property valuations and due diligence, typical skills of an REIB’s employee.
2. Real Estate Private Equity (REPE) Career Path
2.1 Acquisition vs Asset Management
In REPEs, two different career paths are Acquisition and Asset Management.
Acquisition team’s role is to acquire assets by analyzing the property’s value, negotiating with sellers, arranging the finance internally and persuading the General Partner to make the investment.
Asset Management team will take the responsibility to manage the acquired assets. The team role is to operate and/or to develop properties, including fixing current properties’ problems.
In some firms, any employee has to take dual responsibilities. In others, dual responsibilities are only for Analysts and Associates. The bigger the firm is, the higher possibility that they will have specialized staff.
In general, the salary of Acquisition people is higher than that of Asset Management people at the same level because of the traditional view that deals are harder to find and execute. The upside of working in Asset Management is compensation, career growth and work-life balance.
2.2 Hierarchy, Salary and Bonus
Simpler than the hierarchy in a traditional PE firm, REPE only has 4 levels: Analysts, Associates, VP/Principal/Director, and MD/General Partner. There is no Senior Associate in an REPE firm.
Asset Management and Acquisition also owns two different tracks.
Here is the summary of Salary and Bonus across level for your reference. As there are not many REPE firms with different scales, the data hugely varies among those.
|Level||Salary range & Bonus||Duration to be promoted|
|Analysts||$100K – $150K||2-3 years|
|Associates||$150K – $250K||2 – 3 years|
|VP/Principals||$300K – $500K||3-5 years|
|Partner or Junior Partners||$450K – $700K||3-5 years|
|General Partners/MD||$700K – $1M||NA|
Carried interest is also another source of income. The higher you are in the ladder, the more carry you can get. In some firms, carry can be distributed to Associate level if he/she participates in the deal.
Some note for Asset Management side:
- Staff’s salary tends to be lower, about 10 – 20%, than Acquisition side’s.
- Carried interest is still available, but quite limited and probably at Partner level and above.
3. How to get into REPE?
3.1 Common pathways to get into REPE
REPE can recruit people to have either a “Real Estate” background or a “Private Equity” background. Therefore, the two main pathways to get into REPE is from:
- Real Estate Investment banking: same as IB is the feeder for PE. REIB’s people have some real estate knowledge plus deal execution skills that REPE needs.
- Real Estate brokerage such as CBRE or JLL.
REPE can recruit people with other backgrounds:
- Fresh Graduates who have just been out from colleagues.
- Commercial Real Estate Lending or Read Estate debt funds.
- Acquisitions roles at REITs or REOCs.
- Property development roles (not too often and for Asset Management role)
- Post MBA candidate if that person has real estate-related pre-MBA experience
The recruitment process in REPE is less standardized and more need-based focused than the normal PE firm’s one. Therefore, to get into this industry, please prepare yourself for networking and industry knowledge as soon as possible.
- Have an internship in a real-estate-related firm. It is perfect to be in a real-estate investing company but it is still good if the internship is in a normal real-estate organization. Experience of dealing with tenants offers you certain advantages compared to non-experience candidates.
- Join the Real Estate Association. Here you can get some information about the industry and discuss with like-minded people.
- Learn specific skills of this industry, such as: manage tenants, understand rent rolls, analyze real estate pro-forma – which is described by many textbooks as a “cash flow projection” of a property, etc. ARGUS is also a tool that Real Estate companies are using to create real estate pro-forma. Don’t need to purchase it. If you can get some training at schools or in associations, it will help in the job later.
The best schools for Real Estate are different from top schools for PE. University of Pennsylvania, University of Wisconsin – Madison, University of California – Berkeley, New York University and University of Southern California are top 5 US universities for Real Estate.
3.2.1 Timeline and Process
Recruitment in REPE is a lot more ad-hoc and need-based. There is no standard process such as On-cycle and Off-cycle recruitment as the one in traditional PE. Therefore, if you want to land a job in REPE, networking is the key to success.
You still can land a job in REPE and the most effective way is to network with alumni. If not any alumni are available, you better find current professions in REPE by connecting with them on LinkedIn, or emails.
Participating in Industry Associations or any school clubs will also help to connect you to people who are already in Real Estate.
For MBA graduates:
You have to start networking as soon as you get accepted to MBA programs. Similar to the undergraduate group, you should reach out to alumni first, then current professions who can give you the most insight information source.
The interview process will include multiple rounds and you will meet everyone in the firms across levels. After getting through all of them, there will be a case study/modeling test.
Simply put, interview questions will be belong to 4 main categories:
- Why real estate private equity?
- Why REPE but not PE/REITs/REOCs?
- Why the firm?
- How do you work in a team?
- Market/Industry Discussions
- What are the major companies in this industry?
- Which top company will you invest in?
- What are the company’s growth drivers and risk factors?
- What is that company’s outlook in five/ten years?
- Firm Knowledge
- What is the firm’s current portfolio?
- Tell me about the firm’s previous strategies and exits
- What do you know about the firm’s investment thesis?
- What do you think about property ABC and how we can successfully exit?
- Case Studies
- Short version: similar to the “paper LBO” in PE interview, which can last 30 or 60 minutes. In this test, you have to make several assumptions, calculate quickly, make recommendations and answer following up questions
- 1-3 hours test: the test can be up to 3 hours. You have to input more detailed assumptions to calculate the final output
- Take-home test: it is the most complicated format. More time will be spent in market research so that you can back up for your assumption in the models. Solve cases involved in 3-statement models with a focus on the revenue and expense drivers
Real Estate Private Equity careers can offer you high salaries with a better work-life balance compared to the traditional PEs. However, it is a niche industry with not many opening vacancies, making it pretty hard to get in and go up in the career ladder. Therefore, think about it carefully if you just want to give REPE a try.