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Alternative Investment

How Alternative Investment Firms can streamline Real Estate Investments

Ankur has more than 22 years of experience in defining, designing, and implementing large and complex business IT systems across various industry domains, including Private Equity, Insurance, Travel, Media, and Telecom. Prior to co-founding PE Front Office, he worked with a leading PE firm as their Enterprise Architect and with Sapient Corporation, India as their Senior Technology Manager. In 2013, Ankur authored a book titled “Enterprise Technology in Private Equity”, published by PEI Media, London.

 

The Alternative Assets industry has witnessed exceptional growth in the last decade with Private Equity, Hedge Funds, Real Estate, and Private Debt contributing a major chunk of Alternative investments. Sources estimate the industry to reach USD 18 trillion by 2024 and thus Real Estate Assets, that form roughly 9% share of the total alternative investments globally, offer Alternative Investment managers plenty of investment opportunities. 

Although transactions in Real Estate and other asset classes are largely similar, there are some differences in the investment process. One of the major differences is the nature of the investee entity, for example, in the case of other asset classes, the investment is made in ‘Companies’, on the other hand, in the case of a Real Estate fund, the investment is made in ‘Projects/Properties’ of ‘Companies’. While the normal due-diligence process comprises activities such as evaluating the books and performing the ‘quality-of-earning’ review of the company, for a real estate fund, it comprises activities such as inspecting the property, verifying leases, and securing necessary government permits and approvals. When it comes to investment management, while Real estate funds use the loan-to-value (LTV) ratio, other asset classes use the debt-to-equity ratio to measure financial leverage. Another difference can be the valuation methodology, while typically the companies are valued on the Revenue or EBITDA multiple, the real estate projects/properties are valued using either the Income approach, the Cost approach, or the Sales Comparison approach. Additionally, for assessing the financial health of the project/property, real estate funds focus on a different set of portfolio financials such as Capitalization Rate, Net Operating Income, Gross Operating Income, and Cash-on-Cash Return.

The new and innovative investment approaches, complex evaluation processes, compliances/regulations, and hectic schedules of real estate fund managers have led to the need for technology solutions that can help manage and streamline the end-to-end investment process. However, generic technology solutions don’t work well in this industry as each asset class follows different investment processes.

New-age technology solution providers are aware of these needs of the real estate funds and understand that each asset class requires a specific technology solution that is designed with a different focus. Real Estate specific technological solutions can streamline investments by offering extensive monitoring capabilities as well as the flexibility to manage assets at both property and project levels. Below are some major features that an ideal real estate investment management solution should offer:

Deal Management

A robust real estate investment management solution should standardize the deal evaluation process and allow the investment teams to efficiently manage multiple deals to arrive at the winners. Some deal management capabilities offered by an ideal real estate investment management solution are:

  • Simple and intuitive mechanism for easy and automatic deal creation
  • Configurable deal stages and data fields specific to real estate
  • Deal tracking across multiple stages via customizable workflows
  • Comprehensive Reports & Analytics

Portfolio Management

Portfolio Management is a critical task for a Real-Estate Fund. It requires accurate and timely data collation from the respective properties and projects and its analysis in real time. Some portfolio management capabilities offered by an ideal real estate investment management solution are: 

    • Support for multiple asset classes including equity and debt
    • Automated amortization/repayment schedule 
    • Cash flow and Valuation tracking at the property as well as project level
    • Asset Warehousing i.e., easy transfer of asset ownership
    • Automatically calculated performance parameters such as IRR and MoC
    • Provision for managing non-performing assets
    • Cap Table to monitor shareholding pattern, based on the entry and exit of shareholders
  • Flexibility to define Real Estate specific Financial/KPI/ESG parameters such as Capitalization Rate, Net Operating Income, Gross Operating Income, and Cash-on-Cash Return
  • Tracking of Financial/KPI/ESG parameters across different periodicities
  • Investee Portal for easy data upload
  • Comprehensive Reports & Analytics

Investor Management

A real estate investment management solution should empower the investor relations team with extensive capabilities to manage investor relations and maximize opportunities for tracking potential investors, fundraising activities, and investor communication. Some investor management capabilities offered by an ideal real estate investment management solution are:

  • Tracking of detailed Investor information and investment preferences
  • Tracking of fundraising progress via customizable fundraising workflow
  • Tracking of Investor-level drawdown and distribution
  • Monitoring of investor’s investment performance 
  • Support for personalized communication via built-in email communication feature
  • Comprehensive Reports & Analytics

Fund Administration

The increased complexity of new-age specialized funds has made fund administration a complex activity that asks for considerable time and effort. A growing number of Fund managers are seeking refuge in Technology to simplify this complex activity and to their delight, new-age technology solutions are coming up with innovative solutions. Some fund administration capabilities offered by an ideal real estate investment management solution are:

  • Support for setting up complex investment structures
  • Automatically calculated Fund performance parameters such as Gross & Net IRR/MoC, NAV, DPI, RVPI, and TVPI
  • Tracking of fund costs as well as underlying investment cash flows and valuations
  • Tracking of investment details of existing investors including commitment, contribution, distribution, NAV, Gross & Net IRR.
  • Automated drawdown/distribution as well as capital call operations 
  • Comprehensive Reports & Analytics

Utility vs Productivity

An ideal real estate investment management solution should not only focus on utility but also help in improving the productivity of the investment team. Some new-age technology solutions have attempted to fill this gap by offering the following additional features:

  • Seamless integration with third-party data sources for easy transfer of data between multiple systems
  • Built-in Document management powered by digital signature features for easy storage and sharing of important documents
  • Email plugins to access information right from the mailbox without the need to log in to the software
  • Mobile Apps for easy access to information on the go

Conclusion

Maximizing overall investment returns is the primary objective of real estate investment management. However, a lot goes into maximizing the returns, from judicious evaluation of investment opportunities, effective monitoring of portfolio investments, timely reporting to investors to proficient fund administration. Technology contributes big time to streamline these complex and important activities and is poised to show us the correct way forward in the future. 

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