(*The S&P 500 is the leading indicator of US Large Cap Equities. **The IYR ETF seeks to track the investment results of the Dow Jones US Real Estate Index, which measures the performance of the publicly traded real estate sector of the US equity market. ***NCREIF Property Index is a quarterly measure of the unleveraged composite total return for private commercial real estate properties held for investment purposes only.)
After selling your business, your first question may be to ask yourself “How should I invest the liquid proceeds?” You put in years of hard work now you’ve cashed the check. You’re moving into the role of investor, not an owner-operator, and with your personal board of directors to advise you, are looking for opportunities to meet the financial objective of capital preservation for generations to come.
The public markets have been a common vehicle for High Net Worth Investors to put their liquid proceeds to work, but while the markets of the past few years have seen strong returns, recent public market events have been generating high volatility for stock investors. Faced with the specter of rising interest rates just around the corner, it may be an important consideration to look at alternatives to the public markets.
How Private Real Estate Performs in Inflationary Environments
In rising rate environments (such as the current market), public markets have historically displayed higher volatility:
As you can see in the chart above, current interest rates are at nearly 80-year lows and going back to the start of this chart (late 18th century), low interest rate environments reverted to the mean via periods of high inflation.
You may appreciate the economics lesson, but probably want to know how this relates to real estate investing:
As seen in this second chart, between 1978 and 2008, Private Equity Commercial Real Estate produced stronger returns relative to other investment options, including REITs, stocks, and bonds.
Allocation of your portfolio to private real estate may be an important consideration based on your financial objectives.
Relative To The Public Markets, Private Real Estate Has Historically Shown Low Volatility and Consistent Returns
As mentioned above, the bull market we have experienced has been coupled with historically high rates of volatility. If capital preservation is an important objective, low volatility should be a strong consideration for you when allocating your portfolio.
Comparing private real estate returns (represented by the NCREIF Property Index) against two popular public equity indices (S&P 500 representing stocks, IYR representing REITs), between 2008 and 2018, private real estate (despite impacts created by the great financial recession), produced consistent, low-volatility returns, hence low correlation to public markets.
Another important takeaway from this chart is that investing in REITs is NOT the same as investing in private real estate: Between January and February of 2018, for example, the IYR (representing public REITs), dropped 11.4% as the US 10-year treasury rose from 2.43% to 2.85%.
Diversification Calls For Multiple Asset Classes With Low Correlation To Each Other
Diversification is a common word to throw around, but it’s often poorly understood. Diversification is more than putting your eggs in a bunch of different baskets, especially if those baskets all happen to be public equity (stocks, ETFs, Mutual Funds) assets.
The most important consideration when diversifying a portfolio is to invest across multiple asset classes with low correlation to each other.
This call for low correlation via diversification also applies within an asset class. For example, the asset class of private real estate covers of wide space of assets that can be delineated by asset type (multifamily, office, retail, industrial), asset quality (Class A, B, C), geographic location (gateway vs. tertiary metro areas in terms of preference of institutional-grade real estate), among other criteria.
The funds managed by MLG Capital offer this diversification, spreading investments across geographic markets, property types, property classes, even managers.
How MLG Capital Can Help You Invest Business Sale Proceeds Into Real Estate
Private real estate investments are an important asset class consideration for an investor who just sold a business. Offering historically strong returns during inflationary environments, as well as low correlation and low volatility relative to the public markets, private real estate offers true diversification to your portfolio.
With our unique hybrid strategy (direct acquisitions, along with private equity co-investments with managers outside our historic acquisition markets), MLG Capital offers both diversification and specialization, with our network extending to more than 1,800+ contacts from coast to coast.
Disclaimer: MLG Capital has been an active private real estate investor for over 33 years. We’ve acquired over $1.765B in assets* (approximation of current value of assets owned + value of assets disposed), of approximately 19.1 million square feet of space, consisting of 14,083+ multifamily apartment units, in multiple real estate asset classes, in multiple geographies, with multiple real estate sponsors. Past performance is never an indication of future results. As always be sure to complete full due diligence on any investment you make and consult with your trusted advisors. This is not an offer to sell a security or an interest in any investment offering made by MLG Capital or its affiliates and is intended to solely be a resource of thoughts, opinions, and materials to use in acquiring more knowledge about making an investment in private commercial real estate.
(* as of 4/12/2018. Value consists of disposed of assets as well as the current internal valuation of currently held assets as of 3/31/2018. Values may not have been reviewed by an independent 3rd party and may be internal projections.)