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Our fund launch is finally here! Subscribers of this newsletter might recall us teasing this fund launch for months now, but now our ducks are officially in a row and we are ready to fund raise. Our strategy here at Peak 15 moving forward is to invest primarily out of our funds in this Co-GP structure and we are so excited to kick off the first of this series of funds so soon. Before we dig into why this fund is so exciting, let’s take a look at where the market is and how we see our fund fitting into that picture.
Before we get into the current market moves, I will be attending the IMN Northeast Forum on October 3rd in New York City. If you are attending the conference, please feel free to reach out so we can be sure to connect. I would love to put some names to faces and meet in person.
Previously we have given our view on where real estate, and specifically multifamily, is headed over the next few months and years. We still believe that the Fed’s rate hikes will wrap up by the end of the year and a new period of market stability will be upon us by Q1. Most economists agree that the Fed rate required to squelch inflation will be around 4.5%. This means that a 75 basis point raise in November and a 50 basis point hike in December will take us to that target of 4.5% up from the current 3-3.25%. There are meetings by the FOMC scheduled in January and March, but we expect that rate hikes will conclude before then.
It is worth noting that the possibility of a stabilized inflation rate well over 2% is very possible. We believe that either the Fed’s rate increases will bring the inflation rate back down to 2%, or the Fed will realize that 2% inflation is impossible and will stop trying. Either way, we should be arriving at a (more) stable market in Q1 of next year. This is an important prediction, because Q1 of next year is about the time when our fund will be ready to deploy capital.
I want to be very clear about our strategy. We did not purposely time the market to deploy capital during a more stable market. In fact, we do not believe in “timing the market”, we believe in spending time in the market. It was simply by chance that our fund raise lined up with, what we believe to be, the last few rate hikes. Call it a stroke of luck.
That being said, we are very excited about this fund for many reasons, but the way that this fund will help both investors and sponsors is certainly one of them. Most real estate funds only participate as a limited partner in a deal. This means that they will share into the regular cash flows of the property, but are not privileged to the fees associated with managing the property. Many fees in a traditional real estate investment like the asset management fee, acquisition fee, origination fee, and disposition fee are ultimately paid by the limited partners and collected by the general partnership team. Our fund will allow us to be a part of the general partnership team and return some of these fees back to the investor. Because of this structure, our investors should expect returns far higher than anything a limited partnership fund could possibly offer.
We have been getting an extraordinary amount of interest from sponsors as well. One of the hurdles that sponsors must overcome is the capital restraints of growth. In general, 10-15% of the equity required for a deal will be expected to come from the GP. This ensures that the GP has skin in the game. However, this GP portion of the equity stack can be syndicated among other members of the GP team which is where our fund comes in. By allowing us to bring up to 90% of the GP equity stack, the sponsor is able to run the deal while keeping more of their money in their pocket. Of course, this means that we will be sharing in the fees that would have originally gone to the sponsor, but this is a small price to pay for not having to put up a large amount of money up front. For many sponsors, this service that we are providing will allow them to do more deals every year, significantly adding to their bottom line.
This fund is a win-win-win for everybody involved. We are so confident in this strategy that we are planning the future of Peak 15 Capital around raising funds and investing in this Co-GP structure. If you would like to be a part of this fund and our future growth, feel free to reach out to myself or anybody here on our team. We would love to have you.
Keep Climbing!
Contributed by: Peter Vermette
