Retail investors’ appetite for alternative investments – especially commercial real estate – is greater than ever, forcing RIAs to establish relationships with real estate investment firms. It is a mutually beneficial arrangement – by working with real estate sponsors, RIAs can offer their clients a wide range of investment products, and sponsors can efficiently access trillions of dollars in investment capital.
San Francisco-based Ashfield Capital Partners, an employee-owned independent RIA, has been working with real estate sponsors for many years. It currently serves more than 100 high-net-worth and ultra-high-net-worth families and has nearly $2 billion under management.
Adrian Faderhonk, chief compliance officer and portfolio manager at Ashfield Capital Partners, says the firm’s objective to deliver the best risk-adjusted and tax-adjusted returns to its clients requires a highly customized approach. “Since everyone’s situation is different, we should have a full quiver of arrows, including direct access to real estate investing.”
Ashfield Capital Partners works with a number of real estate sponsors to accomplish that firm-wide objective. “We are very prudent about who we work with, and we try to find really excellent real estate sponsors,” notes Faderhonk. “Once we find them, do the due diligence and have a great experience, we keep going back to them.”
One of those sponsors is Hamilton Zanze (HZ), a San Francisco-based real estate investment company that has more than 20 years of experience acquiring and operating multi-family properties across the United States. Since its inception in 2001, the firm has acquired approximately $5.3 billion in multi-family assets and currently owns and operates 132 properties in 17 states.
“Earning the trust of anyone can be very impressive for firms looking to raise capital,” says HZ CEO Kurt Hautkooper. “It broadens our reach to people we might not otherwise meet.”
fastest growing channel
Most real estate investment firms that currently work with RIAs argue that they are the fastest growing source of investment capital. Several trillion dollars of retail capital is currently sitting on the sidelines, eager for exposure to commercial real estate without any intermediaries or direct ownership. Experts estimate that more than 90 percent of that capital is distributed through RIAs that use the three largest custodial platforms: Fidelity, Schwab and TD Ameritrade.
“Because of the democratization of investment, I expect more of our capital to come from RIAs,” says Nitin Chexal, founder and CEO of Palladius Capital Management, an Austin, Texas-based investment management firm that specializes in multifamily and student housing. “Demand from RIA customers has accelerated meaningfully over the past few years, and many of our RIA partners have seen significant growth.”
Many real estate sponsors have established entire teams that are specifically focused on building and maintaining relationships with RIAs and wealth management firms. Consider Native Investing: The Chicago-based real estate investment firm has a division within its Investor Relations group that exclusively handles the firm’s RIA relationships. He is responsible for educating RIAs about real estate and onboarding them to the Origin Investments platform, as well as for ongoing relationship management.
Original Investments currently works with more than 50 RIAs, according to co-CEO Michael Episcope. “This happened systematically over the past six years as individuals would bring in their RIAs as part of due diligence,” he says. “Once they got to know us, many started recommending us to their other customers.”
RIA Origin Investments is the fastest growing channel. Within the next two years, 50 percent of its investors will come through investment advisory firms. “In 2020, we decided to create a dedicated branch to serve this segment of the market because of how fast it was growing and its potential,” Episcope said.
Similarly, Capital Square’s partnership with RIA is growing. According to CEO Louis Rogers, as the real estate investment firm continues to work with broker-dealers to raise funds for its fund, RIAs and wealth managers have emerged as avenues of growth.
Capital Square, which specializes in tax-advantaged real estate investments, including 1031 exchanges and the Opportunity Zone Fund eligible for tax deferral and exclusion, has completed more than $3 billion in transaction volume. It Inc. 5000 for five consecutive years as one of the fastest growing companies in the country.
“RIAs have become our future,” says Rogers, adding that the firm currently works with about 50 wealth management professionals. “It’s not a huge number in absolute terms, but it’s a number that’s growing at a rapid rate.”
an efficient way to raise capital
When it comes to different ways to successfully raise equity, real estate sponsors say RIAs are an extremely effective way to do so.
“Our reputation and referrals from existing investors is our most effective tool in increasing equity, and our work with RIA will be behind this,” says HZ’s Houtkooper.
HZ’s investor base has grown from a few close friends and family to more than 1,300 people, almost all of whom come to the firm through referrals, according to Houtkooper. Working with RIA has come naturally over the years.
“Our investors have included their advisors in the conversation, and HZ has become more well-known within the RIA community,” notes Houtkooper. “RIAs appreciate HZ as a fixed income option, appreciate the boutique nature of our firm and are willing to work extra hard to uncover opportunities.”
Once a sponsor receives approval from the RIA, it could receive dozens of clients and tens of millions of dollars in investment capital. “It’s far more scalable than finding dozens of individual investors directly,” Episcope says.
However, Episcope quickly pointed out that raising funds through the RIA channel is far more difficult than raising money directly from investors. “While individuals make quick decisions, it can take months and even years to successfully convert an RIA lead into a customer,” he notes.
Establishing a Relationship with the RIA
Most often, sponsors spend many years pursuing RIAs before finally having the opportunity to work with them. Getting the attention of RIAs is not only a challenge, but it is also difficult to find RIAs that do not already have relationships with other sponsors. And it’s equally challenging to find RIAs who are willing to put in the time and effort to conduct extensive due diligence on sponsors, HoutCooper notes.
Consider this: HZ employed a typical RIA for nearly a decade before making its first investment. The RIA reviewed several sets of HZ’s offer documents and met with the HZ team several times before giving HZ a chance. According to Hautkooper, today there is a “meaningful” relationship between the real estate firm and the RIA.
Similarly, Los Angeles-based Troian Properties spent eight years pursuing a particular RIA, without much success, according to managing partner Max Sharkansky. However, the real estate firm, which invests in value-added multifamilies along the West Coast, recently learned that the elusive, untraceable RIA plans to invest a large amount of capital with Troian.
While RIAs have historically accounted for 15 to 20 percent of Trion’s investment capital, Sharkansky expects that number to rise to 40 percent in the future, partly due to capital commitments from the aforementioned unnamed RIAs.
“Since RIAs are known to be a great source of capital, they are god knowing how many emails and calls there are every day,” Sharkansky says. “They’re constantly bombarded by sponsors.”
Fadrhonc acknowledged that it’s a very difficult time for sponsors to break into wealth management firms like Ashfield Capital Partners. “If you just send me an email or leave a voicemail, and you butcher my name, that message gets deleted,” he says. “You have a warm lead. It comes from someone we know, like, and respect who says, ‘Hey, I’m working with these guys, and they’re great,'” or ‘You really should meet this group’.
Without a track record it is nearly impossible for new sponsors to capture the RIA’s attention. Since most RIAs take their fiduciary responsibilities very seriously, they will not feel comfortable advising their clients to invest with sponsors that have not proven themselves.
“For a new sponsor, I would ask them to build on that track record with individual investors—friends and family—and small family offices,” Sharkansky says. “Get some deals on your belt, and then once you have a track record, try to come in the door with some RIAs.”
alignment of interests
Experts point out that the tax advantages that real estate investments offer, along with the long-term, illiquid nature of direct investments, creates an alignment of interest between commercial real estate sponsors and RIAs.
“From a relationship standpoint, we look for RIAs that think in a ‘generational wealth’ time horizon, want the liquidity premium of real estate and advocate for the tax efficiency of our offerings,” Hautkooper says. “We think of our work as part of a larger financial picture for our investors and welcome a holistic approach when RIAs, tax advisors, estate planners and others are involved.”
Rogers notes that Capital Square appreciates that RIAs are more relationship-driven, rather than transactional. “RIA has a holistic approach to wealth management that fits the investment products of Capital Square sponsors, focusing on providing the lowest cost and best return on taxes.”
Alexandria, VA-based Bonaventure chose the RIA channel to distribute its funds because of how RIAs hold themselves and align with the firm’s model, according to founder and CEO Dwight Dunton. The vertically integrated alternative asset management company owns and operates more than 6,000 apartment units in 26 communities, primarily in the Mid-Atlantic and Southeastern regions of the country.
“Bonaventure was born out of a family office, and family offices have historically been associated with real estate to provide the preservation of capital, current income and growth potential,” Dunton says. “Real estate provides benefits to portfolios, and because of the fiduciary standard of RIAs, it was an easy decision to focus on RIA distributions.”
Like many other sponsors, Bonaventure has a team dedicated to capital-raising efforts within the RIA channel. While RIAs have differing approaches to due diligence, Dunton noted that most “take a long-term ‘buy and hold’ approach, which aligns very closely with Bonaventure’s long-term, value-creation mindset.”
He further added that RIAs take an institutional approach to investing for the everyday investor by conducting in-depth research on the market and comprehensively examining asset managers.
“In our business, job number one is not to lose it, and job number two is to make more of it. We don’t invest with someone whose track record is going through a big and extended recession,” says Fatherhonk “This is especially important for illiquid investments such as real estate.”