Three Strikes and You're Out

Many investment managers and wannabe investment advisors now put together funds to take advantage of the market distress. There's plenty of talk of mountains of equity capital on the sidelines ready to pounce on deals once there are deals to pounce on. We've heard this talk for several years now and its difficult, no impossible, to quantify just how much money there is. The stock market has already siphoned off capital in its run up this year. Other countries' economies have recovered more quickly than ours---Brazil garners ample attention and capital flows. China rebounds. Investors still like India. Even Europe looks better positioned right now. In short, U.S. commercial real estate is far from the only game in town. Investment managers count on pension funds to be active players, and they will be, but plan sponsors never ramp up in the vanguard--they'll be careful and follow the leaders. And meanwhile U.S. commercial markets list in a suspended animation, offering little action.
 
No doubt, managers and investors will do well with many early cycle U.S. real estate funds investing at market bottom. Once those funds are fully invested, managers will start selling Fund IIs and later Fund IIIs, and they hope the cycle lasts long enough for a Fund IV or even Fund V.
 
Here's my advice to investors. Place capital with cycle-tested managers who have operated successfully at real estate market bottoms before. Their Fund I offerings should do well off buy low gambits--it's hard to mess up as long as you have some level of experience and savvy. Down the road, the Fund IIs may be worth a bet. But investors need to be more choosy about strategies and be clear headed that the market timing won't be as advantageous. When managers start marketing their Fund IIIs, touting the success of Funds I and II--that's the time to turn wary. Remember past success doesn't guarantee future returns. And just turn tail on Fund IV or V offerings. By that time the cycle will be over and it will time to cash out and wait for the next correction to play out.
 
In other words,at three strikes you should be out of the game.