The Primer Series #7: Multi-Asset Funds

Multi-Asset Funds

 Part 7 in a Series by Denis Shapiro

 

WHAT IS THE ASSET?

 

A multi-asset fund is exactly what it sounds like: a fund that includes a variety of different investment types that are typically related in some way. It can also consist of just one asset class, such as residential apartments, but with multiple apartment buildings in one portfolio, as opposed to just one.

As we go through various asset classes in this primer series, you’re probably noticing that sometimes their pros and cons overlap; in some cases, they complement each other, while in others, they don’t. For example, there are some prominent multi-asset funds that include only mobile home parks  and self-storage. If you look at their respective primers, there is some clear crossover: Both asset classes have attracted a surge of investor interest during the last decade; both involve a majority of mom-and-pop sellers with the potential for seller financing; and both usually provide immediate opportunity to improve the NOI due to neglected maintenance and operations. As a result, it makes sense for those two assets to be combined in the same fund. Furthermore, this type of pairing allows the fund operator to choose from among a wider spectrum of opportunities, improving their ability to find the best matches for a specific portfolio.

Note: While most of the deals discussed in this primer center around real estate, there are a wide range of assets that can be combined in a multi-asset fund model. However, I would instantly be leery of any fund that invests in assets between which you can’t draw any parallels. Case in point: The cryptocurrency theme is everywhere these days, but that doesn’t mean I want to invest in a fund that somehow ties in bitcoins to apartment buildings, or vice versa. Likewise, I once looked at a real estate investment deal for what I originally thought was a single property. I liked the operator and the model, but somewhere in the middle of his presentation, the operator started describing a multi-asset fund that was implementing hedges on commodities that somehow tied back to the performance of the property. I didn’t have to look at another slide after that to say no to do the deal. Sometimes, it really is that simple.

 

There are two main types of multi-asset funds:

 

  1. Classic fund manager model — In this traditional model, operators usually have an extensive background in the asset classes in which they specialize. For example, a fund manager in the apartment building space may have been an operator for many years. This expertise gives them an advantage in being able to identify other competent operators. While the fund manager relies on his network and experience to allocate investor money, this is a lot less time consuming than personally operating the individual assets.

 

  1. Operators raising funds for their own deals — In reality, this increasingly popular approach is just like other syndications that we have discussed in other primers, but with considerable added scale and flexibility for the operator. The reasons for using this model vary. Sometimes operators want to have ample capital on hand to seize another opportunity on the horizon or to smooth out some of the peaks and valleys in their capital-raising process. To be certain, there are times when operators get inundated with investor money, and other times when there are so many competing deals being presented simultaneously to the investor community that attracting funding becomes very difficult.

Almost every multi-asset fund is a 506(c) Regulation D fund geared toward accredited investors. The reason is simple: If you are not accredited and invest in a multi-asset fund, that fund manager can no longer invest in any 506(c) deals.

That would add unnecessary hardship to the already difficult job of sourcing quality deals.

Multi-asset funds are commonly called “blind funds.” The reason is because at the time of the initial capital raise, the assets have not yet been purchased. The criteria for the assets are known based on the operator’s track record, but the operator waits until they have cash on hand—or, at the very least, cash commitments have been made—before entering into a contract. This is a common practice since operators pay a lot of money out of pocket for the initial due diligence processes associated with getting a property under contract. As the fund ages (over a period of months or even years), investors have better access to information that helps them decide if the fund is right for them.

Keep in mind that it’s not uncommon for a new fund to wait six months or more to start paying out after the initial launch. Even though early investors continue to earn the accrued preferred distribution during this period, most investors prefer to shorten the period between investment and distribution whenever possible—especially in the case of an income fund.

 

PRO TIP: In my opinion, it’s usually better to invest in a fund closer to its closing than when it first opens, as long as you can accept the possibility of not receiving an allocation if the shares sell out. The reason to invest later is to allow the portfolio to become seasoned so distributions can begin sooner. The risk of being sold out is real, but usually you would receive multiple notifications prior to the fund closing its doors to new investors.

 

For a growth fund, timing the fund investment is a moot point because the business model is so dramatically different. Operators are aware of this, so they usually incentivize early investors with slightly better rates and guaranteed allocations. While my personal preference is to wait, some strong operators rarely have open funds, and the risk of not getting an allocation isn’t worth the delay in some cases.

Similar to apartment building syndications, these assets are highly illiquid. The language in the investment documents clearly states that you will not be able to sell your investment in this security. If you do find yourself needing to get out of a situation that you did not foresee, expect a loss on some of the principal you invested. In the next decade or so, I predict that a secondary market will come into focus for private securities. There are already one or two startups that are currently brokering larger deals. It has a long way to go, but it’s a start.

 

The Pros and Cons of Investing in Multi-Asset Funds

 

PROS

  • Offers instant diversification across asset classes, types, geographies, and time
  • Operators usually have a long track record and deep client base that allows for better terms in individual projects
  • Cash flow is not tied to one project

 

CONS

  • You are investing based on the vision of the fund operator
  • Limited supply of real estate-focused funds compared to single asset deals
  • High minimum investments
  • Due diligence involves more moving parts than a single deal or asset class
  • Compensation structure can get complicated with fund fees, project fees, and profit splits

If you liked this article and wish to continue on your path in learning about alternative investments, please make sure to check out my other educational articles as well as my bookThe Alternative Investment Almanac: Expert Insights on Building Personal Wealth in Non-Traditional Ways

Disclaimer: The information presented in this article is for informational purposes only and does not constitute professional financial or investment advice. The author does not make any guarantees or promises as to the results that may be obtained from it. You should never make any investment decision without first consulting with your own financial advisor and conducting your own research and due diligence. Even though, the author has made reasonable efforts to ensure that the contents of this article were correct at press time. The author disclaims all liability in the event that any information, commentary, analysis, opinions, advice and/or recommendations contained in this article results in any investment or other losses. Your use of the information in this article is at your own risk.

 

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