As expected, 2013 was a record setting year in terms of capital raising efforts for the Direct Investment Industry. Early estimates were pegged at about $20 billion; however, the industry crushed that figure with an astonishing $24.6 billion collectively, across public, non-traded REITs, non-traded BDCs, and other direct participation programs, according to a statement from The Investment Program Association (IPA) and Robert A. Stanger & Company. This was an 84% increase from 2012 which saw inflows of $13.4 billion.
During the mid-2000’s, the Direct Investment industry typically saw inflows of about $6 billion to $7 billion. In addition to product enhancements and improvements in education, there are three recent drivers of this increase.
“Three primary factors helped the Direct Investment industry attain this level of popularity among retail investors and their advisors,” said Kevin Gannon, managing director of Stanger.
“The most significant factor lifting the industry to new levels of equity fundraising is successful liquidity events,” explained Gannon. Liquidity can come in the form of mergers, asset sales, or listing on a public exchange. Investors have benefited from either the cash from transactions or shares of a new publicly traded company that can be sold on a national exchange.
This past year, investors profited from seven non-listed REITs providing liquidity events that delivered over $16 billion of equity.
“These successful liquidity events have both motivated investors in these non-listed REITs to commit capital and reinvest in new programs organized by the same sponsor,” said Hogan, “and confirmed for financial advisors the ability of Direct Investments to provide growth along with above average current income.”
Search for Yield
In today’s low interest rate environment, investors and advisors alike continue to search for opportunities generating attractive yield. Real estate and private corporate development loans continue to have an advantage over more traditional fixed income investment alternatives yielding typically 6% or more. “Investors continue to prefer reliable current income to the pursuit of more speculative growth, and the significant yield advantage available from most Direct Investments continues to attract investors seeking current income,” said Hogan.
Despite a strong market, advisors and investors remain cautious of macro-economic forces and seek portfolio diversification. “Allocating funds to direct investments, which have low correlations with financial market instruments, is a logical and productive strategy in the current economic climate,” said Kevin M. Hogan, President and Chief Executive Officer of the Investment Program Association.
Is this the peak?
Gannon says, “The evolution of this relatively young industry will ultimately lead to substantially higher levels of investment in coming years.”
According to Stanger, approximately $6.5 billion of non-listed REIT liquidations/listings have been announced and are expected to close during the first quarter of 2014.