Before the 1990s, real estate was mostly owned by families, developers, insurance companies, and pension funds. 

Closed-end, blind-pool private equity funds debuted in early 1990s.  The model benefitted from:

1. High cap rates (purchasing fragmented real estate, typically owned by families without other liquidity options)
2. Decreasing interest rates
3. Institutional value-add initiatives
4. Later, portfolio level synergies (internal infrastructure, property level costs)

Now we are in a rising rate environment with peak valuations (low cap rates), private equity firms are scrambling to justify acquisitions with #3 and #4. 

While those levers still work in certain asset classes, we increasingly believe that certain categories, like hotels, do not benefit from private equity.

Why?

1. Often, local family-run operators are more efficient than centralized, for profit hotel managers
   1. They are also better motivated than a helicopter AM team with mercenary GM
2. Private equity teams “design by committee” – same high-design renovations are everywhere, without buy-in from the local community.  “Design by committee is a camel.”
3. I would argue that culture / sense of place are the most important determinants of profitability of a hotel.  Locals, with the correct programming and buy-in, create culture.  Not desktop warriors in New York. 

Is it so wrong that some peoples’ dreams to run hotels should not include a “rollup”? 

Downside for buying small properties unlevered: lower IRR

Sometimes, lower MOIC

Upside: Protect basis during macro downturns

Maximize whole $ profits ("you can't eat IRR")

Significantly less risk of "losing your equity"

Lowers transactional friction (lending process the same for $2m and $40m deals)

Time-horizon and business plan optionality

Most surprising benefit: can offer compelling seller financing at exit to enhance pricing

Current investment market conditions favor real estate debt vs. real estate equity

We like real estate equity, unlevered or low-leverage

In real estate investing, there's a fundamental tension between DURATION and LIQUIDITY.

Benefits of long DURATION in a real estate fund: frictionless compounding of interest, ability to harness Operating Company Value, the power of scale, knowledge of your own assets, data / information. We've materialized this first-hand in our employee housing, neighborhood retail, and vacation rental platforms.

I feel very strongly that real estate investing performs best over long time-horizons.

BUT, it is at the expense of LIQUIDITY to LP investors, who have their money tied up for the long-term with one sponsor / investor.

Paramount to getting comfortable with DURATION: TRUST. Can you TRUST your manager. Who are they as a person. And TRUST is impossible to build in one meeting or one dinner.