Lean and Mean: How Small Funds Outperform Big Funds

“The only way to win is to learn faster than anyone else.”
– Eric Ries

It’s a simple quote, but powerful.
Ries is the author of the New York Times bestseller The Lean Startup: How Today’s Entrepreneurs Use Continuous Innovation to Create Radically Successful Businesses

What this book says, and what you probably already know, is that lean, adaptive entrepreneurs consistently outperform larger, more established organizations. Faster is smarter.

Lean and mean wins and wins big. This is true of private real estate funds too. Consider these facts from Preqin on smaller real estate funds, those with less than $500 million:

  • Smaller funds outperformed mid-size and large funds from 2005 to 2014, with 10.9% IRR compared to 9.1% and 6.9%, respectively.
  • Smaller funds netted positive growth from 2007 to 2017, while mid-size and larger funds had negative growth.

The more detailed Preqin report concludes “smaller funds consistently outperform larger funds”.

Small funds, like small companies, have advantages that larger competitors simply don’t have. In the match between David and Goliath who wins? Here are the five ways the Davids of the real estate investment world stay well ahead of the competition:,

#1: Niche Focused

In order to be profitable, smaller funds will develop expertise in a few select niches. In real estate, this may be medical office space or retail neighborhood centers from 125,000 to 400,000 square feet. The fund will focus exclusively on understanding the market, the players, and the community surrounding the niche. They become subject matter experts, living and breathing their real estate specialty.

#2: Alignment of Interests

This means the partners have a direct stake in the investments, a personal commitment to success. Larger funds typically have a lot less skin in the game, as they have more deals and take a smaller share of the payout per deal. Smaller funds take more risk as they have less capital. In my experience, this risk is offset by the diligence and hard work of the fund. Also, investors tend to be more conservative when they have their own money in the fund along with other investors. When looking for conservative, long-term funds, look to those investors who are committed to the investment, just like you.

#3: Fewer Fees

Funds with fewer people usually have lower fees than larger counterparts. This is often simple economics, as more properties mean more employees, and more employees mean more overhead. Larger funds pass the overhead to investors as additional fees. This also happens when larger funds have to work with more regional or niche-focused funds, who charge their own fees as well

#4: Efficient and Nimble

It’s hard to turn a big ship. Big funds are no different. They have many deals, many employees, and many demands from investors. Smaller funds have fewer demands, and can respond faster to market opportunities (or threats). Also, like startups, a smaller staff means a tighter focus on execution, less overhead, and often a hungrier mentality. Like the Ries quote above, they have to learn fast to thrive.

#5: Precise Deal Target Size

Large funds target large real estate deals. A $1 billion fund will look for deals north of $100 million, engaging with a small range of property types and locations. Smaller funds have access to a range of deals often overlooked by the larger funds. These can include $40 million or less, depending on the fund size, and can be less desirable properties with strong long-term potential.

Should you be investing in a private equity fund, syndication, or other real estate professional. Read this article to see if its worth your time.



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