How Private Equity Real Estate Strengthens Portfolios

Most investors are comfortable with a mix of stocks and bonds – at least until the markets’ ups and downs start making them queasy. Investors can temper the volatility in their portfolios — and calm their nerves – with private equity real estate.

Many people think they don’t need private real estate because they’ve made “well-balanced” stock and bond choices. But a portfolio can’t really be considered balanced until it includes more of the asset classes that produce high risk-adjusted returns. Alternative investments like private equity real estate combine high expected returns with low volatility. They act as a hedge against the boom and bust cycles of the stock market.

Alternative investments

Private Equity Real Estate Complements Stocks and Bonds

That’s because private equity real estate is immune to the daily shocks of trading.

“In times of trouble, real estate’s illiquidity may be a positive,” Savills Studley chief economist Heidi Learner says in a recent report.  “When the sky is falling, real estate is usually at the bottom of the ‘sell’ list,” she notes. Because of the time it takes to do a deal, real estate buyers and sellers keep cooler heads.

Real estate is also a safe haven in a down market. Learner notes that real estate funds have a track record of outperforming the market when the Standard & Poor’s 500 shows negative returns.  What’s more important is that overall appreciation is twice that of the S&P 500.

So when you combine public stocks and bonds and private equity real estate, it actually makes a stronger portfolio than either one by itself.


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A stock and bond portfolio that adds private equity real estate shows the best risk-adjusted return in an institutional investment study by the National Council on Public Employee Retirement Systems — better than stocks and bonds alone, better than blends of private real estate and real estate investment trusts (REITS), and better than a mix of stocks and bonds with public and private real estate funds.

Why Private Equity Real Estate Returns Can Be Greater

REITs are tied to the stock market’s rise and fall, while private equity real estate is priced on its fundamentals. The majority of REITs trade on major stock exchanges and are part of an index, so they move for reasons beyond the real estate’s inherent value. When the market falls, REITs fall too, while private real estate funds move in a different cycle than stocks and bonds.

Because they’re publicly traded, REITs lose much of that countercyclical advantage. When the market goes down, investors are tempted to sell — and lock in their losses. In that way, REITs don’t offer the diversification of private equity real estate.

Private equity investors also can get access to direct institutional-grade investments at market or below-market prices, depending on fund and skill of the manager they choose. By contrast, REITs sell at a premium beyond the cost of trading, including high management fees and commissions.

The end result is that private equity real estate gives investors real diversification because it can offer high returns not tied to public market gyrations. It is a strategy that can build wealth for the long run.

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David Scherer formed Origin Investments in 2007, along with cofounder Michael Episcope. He has over 17 years of experience in real estate investing, finance, development and asset management.
Twitter: DaveScherer01
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