Assets vs. Structure
It is possible to invest in the same asset but have a different investment experience, depending on the structure of the offering. For example, consider the same Class-A multifamily property generating stable cash flow, but structured within two different non-traded alternative investments:
NON-TRADED STRUCTURE
Example Asset: Class-A Multifamily Property with Stable Occupancy
- Large public portfolio fund - Quarterly redemption option - Established sponsor
- Private single-asset fund - No liquidity during hold period - New up-and-coming sponsor
Quarterly redemption program, typically with a periodic cap on total redeemable shares, possibly subject to withdrawal fee
Ability to access invested funds
No option to redeem; transferability limited in first year per SEC rules
Fund required to hold significant percentage of equity as liquid cash, typically at a much lower interest rate than the core fund assets—this lowers overall performance of fund shares Fund required to have board with independent directors, pay SEC registration fees, provide audited financials, make ongoing public filings and comply with Sarbanes-Oxley Act With a large sponsor and the ability to cross-collateralize assets, this fund negotiated a lower-than-average interest rate to acquire the property
Fund not required to maintain pool of cash to redeem shares; other than reserves, all equity is invested in core fund asset
Impact of liquidity on fund performance
No board of directors, no public filing fees, lower accounting costs—but fund and sponsor information may be less transparent and less accessible
Organizational expenses
With a newer sponsor and no other properties, this fund negotiated a higher-than-average interest rate, thereby impacting net distributions
Debt service
The performance of this property— good or bad—is diluted by the results of multiple other properties
Performance of the fund rests entirely on the results of this one property
Egg/basket ratio
The hypothetical example is for illustrative purposes only and does not guarantee results. Individual results may vary. Potential cash flows are not guaranteed and could be lower than anticipated. *
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