Digging In

REVIEWED BY THE CERTIFIED PUBLIC ACCOUNTING FIRM EDWARDS & CO. SOURCE: THOMSON REUTERS CORP.

Private Equity Firms

*IN MILLIONS, 2007 FIGURES REPRESENT EXPANDED LIST WITH FIVE ADDITIONAL FIRMS. AS OF DEC. 31. PREPARED BY B.E. RESEARCH. REVIEWED BY THE CERTIFIED PUBLIC ACCOUNTING FIRM EDWARDS & CO. **INCLUDES REAL ESTATE PROPERTIES

Building Blocks of Commercial Real Estate
While the economy has suppressed gains in the residential space, commercial real estate investors are continuing to generate returns — albeit mainly in underserved (sometimes called emerging) markets in the U.S. or in international markets such as India or the United Arab Emirates. Generally speaking, investment options consist of four major categories:

1. Real estate developers such as The Peebles Corp. (No. 18 on the BE INDUSTRIAL/SERVICE 100 list with $245 million in revenues) and RLJ Development (No. 5 on the BE INDUSTRIAL/SERVICE 100 list with $704.3 million in revenues) use investors’ money to complete a real estate project. They typically want to get in, manage the project to be constructed, and then sell it off upon completion. Since developers generally have a minority interest in the projects (the principal investors get the majority), their returns are generated when the property is sold. Developers are generally not looking to hold properties for long periods of time. Because they typically oversee construction projects for a fee, these firms remain part of our BE INDUSTRIAL/SERVICE 100 list.

2. Real estate private equity firms such as MacFarlane Partners (No. 1 on the BE PRIVATE EQUITY FIRMS list with $20 billion in capital under management) typically raise institutional capital and try to leverage that capital as an equity investment in real estate assets. Over the years, they’ll manage those assets and get to an exit strategy that allows them to either sell or refinance to enable their investors to gain a return. Similar to private equity firms that invest in operating companies, these firms raise money, acquire properties, and generate ongoing fees for managing that real estate.

3. Real estate asset managers such as Capri Capital Partners (No. 4 on the BE ASSET MANAGERS list with $4.5 billion in assets under management) function in many ways similarly to banks. As opposed to the private equity firms that raise capital and acquire properties, real estate asset managers fund the projects. They’re involved in the financing of the real estate transaction rather than being involved in the hard assets. Their return is generated by fees and interest on the investment (similar to a bank loan). Like other asset managers, they can hold, increase, or sell their investment stake in a project.

4. Real estate investment trusts (REITs) are corporations or trusts that own or operate income-producing real estate. Publicly traded REITs function like closed-end mutual funds.