Practical Applications of The Role of Financial Leverage in the Performance of Private Equity Real Estate Funds

Abstract

Leverage is the scourge of private equity real estate funds, according to the results of this detailed research on the three main investment styles: Core, value-added and opportunistic.

Investors beware: Base your manager selection decisions on underlying sector and market knowledge, rather than implied skill at using and timing leverage, the authors caution. Leverage may add positive returns in the short term, but managers are not good at predicting a downturn or of reducing leverage in anticipation of a downturn, they explain.

“A lot of private equity real estate managers claim to have done things well-to correctly time the market (in leverage decisions)—but, in fact, they did not,” says co-author Andrew Baum, Honorary Professor of Real Estate Investment at the University of Cambridge .

The article was co-written by Jamie Alcock, Associate Professor at the University of Queensland in Australia and Lecturer at the University of Cambridge , Nicholas Colley, Senior Analyst at Property Funds Research , and Eva Steiner, PhD candidate at the University of Cambridge .