In prior posts, I’ve mentioned the almost three years I spent in the early 2010s working for one of the world’s premier institutional investors, a giant Middle East sovereign wealth fund (which I call, for short, the “Fund”). As a member of the Fund’s Real Estate Department Executive Committee, I was part of the team that routinely reviewed dozens of investment proposals every year to determine whether they would be a fit for us and our portfolio.
Literally every real estate investment manager of any size or significance on the face of the planet would, sooner or later, find their way to our office on a regular basis with their latest fund offering, driven by some strategy they’d cobbled together for making vast riches for their prospective investors. We were shown investments with internal rates of return (IRRs) anywhere between 20% and 35%.
But, those were typically gross returns, i.e., before giving effect to the fees charged by the manager, which, once deducted, would yield net returns.
Since the latter determined what we got paid at the end of the day, we were all about net returns.
So, as a matter of course, we had our analyst team calculate what we could expect by way of net returns and then subtracted them from the gross returns proposed by the investment manager to determine what we called the fee drag.
For example, if the manager’s strategy was targeting a 20% gross return but our net return was expected to be more like 15.5%, we were looking at 450 basis points of fee drag.
And that was about the median number. Fee drag could range from 350 basis points on the low end to 550 basis points on the high end. Most of this hit to our return was attributable to the manager’s carried interest or “promote.” As you may know, this is the name for the disproportionately larger share of distributions, by comparison to their percentage capital commitment, to which the manager is entitled if the IRR from an investment exceeds some specified “hurdle rate,” usually set well below the projected return, at around 7% or 8%.
Which was fine, since we were a giant sovereign wealth fund in a position to look out for ourselves and could negotiate the best deal we could get on fees from the manager—we exercised our market power, generally speaking, to cause the fee drag to be such that it left us sullen, but not mutinous.
Moreover—and here I finally get to the punchline—it was specifically for the purpose of providing retail investors with an option for investing in institutional-quality PRE without suffering undue fee drag, while offering attractive advantages such as daily subscription, daily pricing, and quarterly liquidity, that WE FOUNDED ACCORDANT IN THE FIRST PLACE—we are purpose-built to offer the average investor the opportunity to invest in institutional quality PRE via ’40 Act interval funds that are easy for investors to access—the funds have or will have ticker symbols and no need for subscription documents— and that have fee structures that are purposefully designed to cause meaningfully less fee drag than the other PRE products on offer today.
We don’t for example, charge any carried interests or promotes to any of our sponsored funds. That is a meaningful savings in fees to the investor right there—very meaningful indeed.
Our first investment product, the Accordant ODCE Index Fund (ODCEX), typifies this approach. When USAA Real Estate spun us out as a standalone company, it also contributed to Accordant’s holding company its equity ownership in IDR, making Accordant and IDR sister companies. As the adviser to ODCEX, Accordant has retained IDR as the sub-advisor, thus accessing for our investors’ benefits the IDR knowhow and technology for investing in the ODCE Index with a relatively small amount of tracking error.
Our passion for delivering quality investment opportunities to investors—having both ease of access and semi-liquidity— while managing down their fee drag is at least in part a legacy from our early years at USAA. Just as we learned then to elevate the interests of USAA members above our own individual interests, we have resolved to make the interests of our clients, those who invest with us in ODCEX and our other fund products, our highest priority. That means, in a nutshell, offering them the advantages of high-quality PRE investing while keeping our fees at a level that doesn’t effectively undermine those advantages by diluting returns through a heavy fee drag.
Our entire business model is built around this premise. We’re privately owned, so we don’t need to worry about meeting quarterly earnings projections. We’re a small team of seasoned professionals who know the private wealth space through-and-through, and we have a modest cost structure that we carefully manage. None of us is a billionaire and you won’t find us flying around on private jets.
We’re one hundred percent committed to using our talents and abilities to the fullest extent in the service of offering a suite of investment products that can be curated to satisfy the needs of retail investor portfolios—exposure to the index, income, growth, or whatever mix makes the most sense to the investor.
Plus, this is the only thing we do. We’re not some great big hulking Wall Street private equity shop that has five hundred institutional investors some of whom might just need to be shown the best investment opportunities first, given their existing close relationships with the manager and the hundreds of millions they have under the firm’s management, before the team down in retail gets a look. No. Our only interest is in a commitment to excellence in our execution on behalf of our investors in our fund products, without the need for their returns to suffer from excessive fees.
This is what we came together as a team to do in 2023, when USAA Real Estate spun us out as a free-standing business, and when, later that year, we launched ODCEX, and this is what we are doing now and will be doing on into the future.
Okay, that’s it for the commercial. Now you know why Accordant exists and what it exists to do.
For my next post, we’re going back to where we started, and that’s the Houston Galleria and, specifically, how it came to be developed and financed way back in the day. I think you’ll find it fun and interesting.
That post will be the first of several in which I intend to trace the evolution of PRE financing back from those old days up to the present.
Accordant Investments LLC (“Accordant”) is an SEC registered investment adviser. For more information about our services and disclosures, please visit our website at www.accordantinvestments.com.
This article reflects the personal views and experiences of the author and is provided for informational purposes only and does not constitute an offer to sell, or a solicitation of an offer to buy, any product or service offered by Accordant Investments or its affiliates.
An investment in the Accordant ODCE Index Fund (“ODCEX”) is suitable only for investors who can bear the risks associated with investments in the Underlying Funds and the various real estate equity and debt strategies which such Underlying Funds utilize, with potential limited liquidity. Even though the Fund makes quarterly repurchase offers for its outstanding Shares, investors should consider the Shares to be viewed as a long-term investment within a multi-asset personal portfolio and should not be viewed individually as a complete investment program.
RISKS
Investing in the Fund involves a high degree of risk. The following list is not exhaustive. Please review risks related to an investment in the Fund set forth in the “Risk Factors” section of the prospectus. These include, but are not limited to the following: convertible securities risk, correlation risk, credit risk, fixed income risk, leverage risk, and risk of competition between underlying funds.
Past Performance is No Guarantee of Future Results.
Investing in the Accordant ODCE Index Fund (“ODCEX”) involves risk, including the risk that you may receive little or no return on your investment or that you may lose part or all your investment. The Fund’s investment objective is to employ an indexing investment approach that seeks to track the NFI-ODCE Index on a net-of-fee basis while minimizing tracking error. There can be no assurance that the actual allocations will be effective in achieving the Fund’s investment objective or delivering positive returns. It is not possible to invest in an index.
Investors should carefully consider the investment objectives, risks, charges, and expenses of the Accordant ODCE Index Fund. This and other important information about the Fund is contained in the prospectus, which can be obtained online by visiting www.accordantinvestments.com. The prospectus should be read carefully before investing. For differences between the Class I Shares, Class A Shares, and Class Y Shares, please see the prospectus of the Fund. The Accordant ODCE Index Fund is distributed by ALPS Distributors, Inc (ALPS). Accordant Investments LLC is not affiliated with ALPS.
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