August Fundraising for Direct Investments Marches to Record Annual Investment Total

ELLICOTT CITY, Md., Sept. 16, 2013 (GLOBE NEWSWIRE) -- Investor demand for public non-listed real estate investment trusts (REITs), non-listed business development companies (BDCs) and other direct participation programs (collectively, direct investments*) continued at a blistering pace as summer drew to an end. Total fundraising by the direct investment industry in August topped $2.6 billion, an all-time monthly record set in a traditional vacation month according to The Investment Program Association (IPA), a trade association for non-listed direct investment vehicles, and Robert A. Stanger & Company, an independent investment banking firm that specializes in direct investment securities. Combined with July investment, which also set a record high mark, over $5.2 billion dollars have been placed in the direct investment space during the past two months. Data developed by Stanger show equity capital flows to direct investments so far in 2013 have reached almost $16 billion compared with $8.9 billion during the same period in 2012 – a 79% year-over-year increase. Year-to-date investment has surpassed the total annual sales for every year since the 1980s.

"We can comfortably forecast that total equity capital flows to public direct investments will top $18 billion this year and are likely to reach $20 billion," said Kevin Gannon, managing director of Stanger. "That total would exceed by over $6 billion the highest previous full year record set in 2007," said Gannon.

"The current economic and financial market climate remains highly conducive to allocating funds to direct investments," said Kevin M. Hogan, President and Chief Executive Officer of the Investment Program Association. "Although interest rates have had a minor uptick recently, the significant yield advantage available from most direct investments continues to attract investors seeking current income," said Hogan.

"Uncertainty constantly colors the landscape of the financial services industry," said Keith Allaire, a managing director of Stanger. "Diversifying portfolios with hard assets is a prudent response to the kaleidoscope of geopolitical, economic, fiscal and monetary risks that investors face today," said Allaire.

Among the geopolitical uncertainties are the form and consequences of an American response to the use of chemical weapons in Syria and the long-term implications of the Arab Spring on Middle East security and world oil markets. Economic, fiscal and monetary uncertainties motivating advisors to recommend diversification into direct investments also include the pace and sustainability of the U.S. economic recovery, weaknesses in the global financial system, the pending debt ceiling and budget debate in Washington, significant potential revisions to the tax code, and the longer-term potential for inflation.

Investors Harvest Gains & Plant Seeds

According to Stanger, the industry's base annual investment run rate has been increasing in recent years -- from around $6 billion to $7 billion in the mid-2000s to $10 billion to $13 billion today. This increase reflects an evolution of the product to more investor-friendly structures, more robust education of financial advisors and investors to the potential benefits of the various classes of direct investments, and the introduction of non-traded public business development company products to this market.

"The record levels of investment we are seeing this year are event-driven," explained Gannon. "The most significant factor lifting the industry above its base run rate is successful liquidity events." Liquidity events can take the form of portfolio sales, mergers or listings of matured non-listed REITs formed in prior years. These events provide either liquidating cash distributions to investors or shares of a publicly traded company which can then be sold on a national exchange. During the past 18 months, nine non-listed REITs have provided liquidity events. The five liquidity events which have occurred so far in 2013 have returned over $12 billion of equity to their investors.

"A successful liquidity event has two components," said Hogan, "First, timely execution compared to what investors anticipated when they purchased shares of the non-listed REIT. Second, and more important, a liquidation value at a premium to the $10 original issue price of the shares." Programs that purchased real estate assets in the wake of the 2007-8 financial crisis have generally provided such premiums to their investors.   

"Investors who have enjoyed the anticipated levels of current income and then harvested gains upon liquidation are rewarding successful sponsors by seeding new programs with additional capital," said Gannon, citing American Realty Capital and Cole Real Estate Investments, the two leading real estate capital raising sponsors, as examples of this phenomenon.  (See table below.)

Stanger reports that an additional $8 billion of non-listed REIT liquidations have been announced and are awaiting closing in three non-listed REITs – American Realty Capital Trust IV, Columbia Property Trust (formerly Wells Real Estate Investment Trust II), and Corporate Properties Associates 16 – Global.

Equity Invested in Non-Listed REITs Surpasses Traded REITs

Approximately 82% of August total investment and 81% of year-to-date total investment have been directed toward public non-listed REITs.  Following a $2.1 billion month in July, these real estate investments attracted approximately $2.2 billion of direct investment capital in August, the highest monthly total for non-listed REITs on record, and an 83% increase from August 2012. (See table below.)

In August, more equity capital flowed into public non-listed REITs than into traded REITs – an event which occurs about 18% of the time, typically when the stock market is experiencing duress. The non-listed REIT industry typically raises more capital per month than traded REIT IPOs. During the past five years non-listed REITs raised almost $50 billion of equity compared with $12.2 billion of traded REIT IPOs. When secondary offerings are included in the traded REIT total, non-listed REITs generally account for between 20% and 45% of total annual investment in the REIT industry. "The non-listed REIT product has demonstrated considerable capital raising resiliency relative to the traded REIT product, especially when equity markets are in flux," said Allaire.  "In coming years as the product evolves, the industry is likely to see the entry of more real estate asset management companies seeking to enhance their all-weather access to capital and develop a new channel to retail and retirement investors."  

BDCs Have Record-Setting Month

The second largest sector of the public direct investment marketplace is BDCs, which provide financing for growth to businesses in a wide variety of industries which are otherwise capital constrained. "BDCs have become a staple of the direct investment market," said Hogan. Investment in BDCs set a one-month fundraising record in July of $464 million, only to be surpassed by August fundraising of $478 million.  Year-to-date investment in non-listed BDCs has topped $3 billion, compared with $1.8 billion raised in the comparable period last year and $2.8 billion raised in all of 2012.

Robert A. Stanger & Co., Inc., a Shrewsbury, New Jersey-based investment banking firm specializing in real estate and direct participation program securities, provided the fundraising data cited herein. The company is a leading source of information and research on the direct investment industry and is regularly involved in real estate mergers and acquisitions, debt and equity financings, real estate appraisals and securities valuations. Stanger is also the publisher of The Stanger Report, Stanger's Market Pulse, and The Stanger Digest, publications focused on the direct investment industry.

The Investment Program Association (IPA) was formed in 1985 to provide effective national leadership for the direct investment industry. The IPA supports individual investor access to a variety of asset classes not correlated to the traded markets and historically available only to institutional investors. These investments include public non-listed REITs (NLREITs) and Business Development Companies (BDCs), Energy and Equipment Leasing Programs, and private equity offerings. For the last 28 years, the IPA has successfully championed the growth of such products, which have increased in popularity with financial professionals and investors alike. Direct investments are held in the accounts of more than 2 million individual investors. The mission of the IPA is advocating direct investments through education. Access the wealth of IPA educational materials here, or visit the IPA online for more information about becoming a member.

To stay up-to-date with IPA news, follow @IPADirectInvest on Twitter.

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* Most direct participation programs and non-listed REITs available today offer the average investor a way to own economic interests in tangible assets such as institutional quality real estate, oil and gas reserves, and equipment. These underlying assets tend to respond to broad economic and capital market changes differently than exchange-traded stocks. BDCs provide financing to small and mid-sized businesses, and in recent years have sought to capitalize on the relative lack of sufficient debt capital relative to demand in these markets.