Since the mid 1990s, many institutional investors in the US have been including what they call ‘opportunistic’ investments or ‘opportunity funds’ in their portfolios. The recent growth rates of this segment of the market have been impressive. In its April 2001 report, Pension Consulting Alliance (PCA) indicates that opportunistic real estate funds total in excess of $70bn (e80bn). Further, the Institutional Real Estate Letter in January 2002 reported that plan sponsors allocated 9% of their real estate allocation for 2001 to opportunistic real estate.
As the interest in opportunistic real estate investment has grown, so has the need for an opportunistic real estate investment benchmark. Many investors are unsure as to how to benchmark these investments. The purpose of this article is to shed light on how these investments should be may be benchmarked.
We should first identify what we mean by ‘opportunistic’ real estate funds. These are funds that typically target real estate investment in the higher risk categories. Their investment structures tend to be modelled after private equity investment vehicles. Many try to capitalise on distressed market conditions and/or involve the use of significant leverage. Most opportunistic funds are structured as limited partnerships or limited liability companies with investment time horizons in the five- to seven-year range. Investment advisers/money managers attempt to align their interest with investors by contributing equity capital to the fund partnership. The fund managers also typically receive a back-ended compensation called ‘carried interest’ which is only earned if investors achieve a minimum return threshold.
In recent years, the Association for Investment Management and Research (AIMR) has attempted to standardise both performance measurement methods and performance reporting. AIMR requirements for all asset classes include calculation of the total return, including realised and unrealised gains plus income and time-weighted rates of return (TWR). Portfolios must be valued at least quarterly, and periodic returns must be geometrically linked.
Specific AIMR requirements of real estate investments include independent appraisals at least once every three years and the review of real estate valuations at least quarterly.
Opportunistic real estate investments share many of the characteristics of venture and private placements (private equity investments). The additional AIMR standards for private equity reporting by fund managers require cumulative internal rate of return (IRR) since inception of the fund; IRR computed net of fees, expenses, and carried interest and IRR presented in a vintage-year format.
In the PCA report, Gerrardo Lietz recommends the following best practices for opportunistic real estate funds: report TWR quarterly, on both a gross and net basis, through the calculation date; report since inception IRRs, cash only on a quarterly basis; and report since inception IRRs, realised and unrealised results on a quarterly basis.
Different US plan sponsors place greater or lesser emphasis on the use of IRRs versus TWRs as performance measures for opportunistic real estate funds. Many plan sponsors want to see both performance metrics. Most plan sponsors surveyed reported their performance results to their supervisors on a TWR basis. However, several plan sponsors use the private equity approach and focus on the IRR.
We believe the private equity performance measurement approach will help provide the appropriate returns needed to benchmark opportunistic real estate investments. Our discussion of the benchmarking process follows.
Bailey, Richards and Tierney, in a 1998 article in Journal of Corporate Finance, suggest that a valid benchmark for any investment, should be: unambiguous, investable, measurable, appropriate and specified in advance.
In other words, a valid real estate benchmark should represent a clearly defined, passive alternative investment that the investor could hold instead of the one under consideration. In addition, it should be possible to calculate the benchmark’s performance on a frequent basis. Also, the real estate benchmark needs to be known to all interested parties prior to the beginning of the evaluation period.
Tierney and Bailey, in a 1997 article in Journal of Portfolio Management, suggest that the benchmark for an opportunistic investment (or a series of real estate opportunistic investments), should be composed of benchmarks applied to the investments in which the investor would place its funds were it not to undertake the current opportunistic investments. In other words, opportunistic real estate investments should be benchmarked against alternative investments available to the investor.
This type of opportunistic real estate benchmarking should satisfy the properties of a valid benchmark. However, it is important that the alternative investment reflect the same level of systematic risk (market risk) as that of the opportunistic real estate investment being considered. For example, a domestic real estate opportunistic investment might be benchmarked against a high-beta component of the investor’s domestic public real estate equity benchmark.
A significant amount of capital is flowing into opportunistic real estate investments. This has stimulated a need for appropriate performance benchmarking techniques. Real estate opportunity funds share many similar characteristics with private equity funds. Thus, the performance measurement techniques and benchmarking methods used for private equity are equally appropriate for benchmarking the performance of opportunistic real estate funds. Opportunistic real estate investments can be benchmarked against alternative public investments of similar market risk available to the investor.
Will McIntosh is managing director and William Whitaker is vice president, investment research, at AIG Global Real Estate Investment Corp in New York
FAQs
What is an example of an opportunistic strategy? ›
Examples of opportunistic investment strategies
For example, a warehouse may be converted into an office space, with some redevelopment of the interior to make it better suited for its new purpose, without the need to construct a new building entirely.
Opportunistic Strategies. As the name indicates, such strategies seek to profit opportunistically from fundamental themes, inefficiencies and dislocations in the financial markets at a macro, market sector, stock specific, factor, or even exchange level.
Do you think opportunistic funds can be benchmarked? ›Opportunistic real estate investments can be benchmarked against alternative public investments of similar market risk available to the investor.
What is benchmarking in private equity? ›Private market benchmarks are standards against which investors and other private market professionals can compare the returns of a fund to the returns of its peers.
What are examples of opportunistic behaviors? ›Adherence to one's own interests, including on false pretenses, including here such obvious forms of deception as lie, stealing, fraud.
What is primary vs opportunistic? ›Fungi may be classified also according to virulence, as primary pathogens or as opportunistic pathogens. A primary pathogen may establish infection in an immunologically normal host; whereas, an opportunistic pathogen requires some compromise of host defenses in order for infection to become established.
What does opportunistic mean in business? ›When you're opportunistic, you take advantage of that chance, usually immediately. Most of the time, this word is not neutral: people described as opportunistic are also considered unethical, like a business taking advantage of employees or customers in an opportunistic way.
What is the concept of opportunism? ›: the art, policy, or practice of taking advantage of opportunities or circ*mstances often with little regard for principles or consequences.
What is an example of opportunism in marketing? ›In the context of marketing channels, opportunism occurs when a channel member shows crafty behavior, such as lying, stealing, and cheating, to advance its self-interests at the expense of its partner (Wathne & Heide, 2000).
What are the three types of benchmark? ›Three different types of benchmarking can be defined in this way: process, performance and strategic.
What are the two types of financial benchmarking? ›
Internal benchmarking compares the performance of different stocks within the same portfolio, while external benchmarking compares total portfolio performance to other portfolios that are either in the same industry or different industries.
Is there a difference between benchmark and target? ›A performance target focuses on all the students in the program and is the percent of students that meet or exceed the benchmark. Performance targets should be described in terms of percentage at (or above) the benchmark. They should not be described in terms of averages.
What is benchmarking in ESG? ›It is the practice of comparing a company's ESG performance against peers within its industry.
What are the different types of benchmarking benchmarking? ›There are four main types of benchmarking: internal, external, performance, and practice.
Is opportunistic positive or negative? ›When applied to people, the label “opportunist” usually has negative connotations. It implies that the people so labeled take unprincipled, unfair advantage of opportunities for selfish ends. Opportunistic people are often also regarded as exploitative.
What is meant by opportunistic behavior? ›Opportunism is the practice of taking advantage of circ*mstances – with little regard for principles or with what the consequences are for others. Opportunist actions are expedient actions guided primarily by self-interested motives.
What is strategic vs opportunistic? ›Opportunistic means responding to whatever opportunity presents itself, while strategic means carefully pursuing and selecting only those opportunities that support your bigger strategic goals. Unfortunately, that often means saying NO in the short term, which is not easy to do.
What are opportunistic conditions? ›Opportunistic infections (OIs) are infections that occur more often or are more severe in people with weakened immune systems than in people with healthy immune systems. People with weakened immune systems include people living with HIV. OIs are caused by a variety of germs (viruses, bacteria, fungi, and parasites).
What are the characteristics of opportunistic? ›Opportunist organisms have three main characteristics: (1) they are usually organisms of low pathogenicity, (2) they cause serious infections mainly when the host's defense mechanisms against infection are impaired, and (3) they can behave as conventional pathogens but under opportunistic conditions may cause atypical ...
What's another word for opportunistic? ›On this page you'll find 12 synonyms, antonyms, and words related to opportunist, such as: carpetbagger, bounder, go-getter, ingrate, timeserver, and trimmer.
What are the types of opportunism? ›
Opportunism is self-interest-seeking with guile. More blatant forms of opportunism include cheating, lying and stealing. Opportunism more often involves subtle forms of deceit, such as economic hold-up problems, adverse selection and moral hazard.
What is the difference between opportunistic and opportunism? ›One is an opportunist: He boards possibility after possibility but jumps ship when the business gets tough or when another possibility appears to offer brighter prospects. The other is opportunistic: He stays the basic course while capitalizing on ways to improve his products and service.
What is opportunism in marketing? ›It involves “the art, policy, or practice of taking advantage of opportunities or circ*mstances often with little regard for principles or consequences” in spite of promises made ex ante (Merriam-Webster Dictionary).
What is the threat of opportunism? ›The threat of opportunism exists when one party to an exchange has made a transaction-specific investment, while others have not made such an investment.
What are the 5 types of benchmarking? ›- Internal benchmarking. Internal benchmarking is pretty straightforward. ...
- External benchmarking. External benchmarking is comparing an internal process to that of a competitor or even several other organizations. ...
- Competitive benchmarking. ...
- Performance benchmarking. ...
- Strategic benchmarking. ...
- Practice benchmarking.
*Benchmarking: Although Starbucks are the largest coffee house in the world, Benchmarking against their competitors enables them to learn competitors strengths and weaknesses. E.g. As Costa provide a cheaper coffee Starbucks could undercut Costa by offering student pricing.
What is the best type of benchmarking? ›Process benchmarking
This type of benchmarking may help you identify opportunities to increase operational efficiency and implement best practices. Process benchmarking typically helps organizations define their current processes across departments and understand how they compare to industry standards.
- Phase 1: Current State Assessment.
- Phase 2: Benchmarking Participant Identification.
- Phase 3: Comparative Analysis.
- Phase 4: Strategic Prognosis.
The basic types of financial analysis are horizontal, vertical, leverage, profitability, growth, liquidity, cash flow, and efficiency.
What is strategic benchmarking? ›Strategic Benchmarking – Compares the strategies of successful businesses with those of your own, It helps you define strategic goals and steps forward for better results. Competitive Benchmarking – Compares your metrics directly to your competitors' metrics.
Is benchmarking a KPI? ›
The answer is simple: They are not. Benchmarks are reference points to compare your performance with that of others. KPIs help you chart your progress against your company's strategic goals.
What are three process benchmarking? ›There are many different types of benchmarking that fall into three primary categories: internal, competitive, and strategic.
What is functional benchmarking? ›Functional Benchmarking (also known as operational or generic benchmarking) compares internal functions with those of the best external practitioners, regardless of their industry.
What are the most common benchmarks? ›Some widely used benchmarks in the stock market are the Wilson 5000, Dow Jones Industrial Average, and the Russel 2000.
What is Six Sigma benchmarking? ›Benchmarking in Six Sigma involves a company analyzing its performance rather than measuring it against the standard set by the industry they work in or a world-class company in another industry. It typically focuses on processes and operations within one area of the company.
What is Kaizen benchmark? ›Benchmarking is a source of Competitive Advantage and Continuous Improvement (Kaizen). Wikipedia defines benchmarking as: Benchmarking is the process of comparing one's business processes and performance metrics to industry bests and best practices from other companies.
What is the difference between benchmarking and Six Sigma? ›Benchmarking aims to identify areas where your company can improve its efficiency and effectiveness. Lean Six Sigma is a methodology that relies on benchmarking to help organizations identify areas where they can improve their operations.
What is the difference between benchmark and benchmarking? ›Benchmarks and benchmarking: definitions
Benchmarks are reference points or measurements used for comparison, usually with the connotation that the benchmark is a 'good' standard against which comparison can be made. Benchmarking is a process of finding good practice and of learning from others.
Benchmarking analysis is a specific type of market research that allows organizations to compare their existing performance against others and adopt improvements that fit their overall approach to continuous improvement and culture.
What is an example of opportunism in microbiology? ›An example of an opportunistic microorganism is Haemophilus ducreyi. This microorganism infects its host through broken skin or epidermis. In other words, without an open wound, this sexually transmitted disease would be unable to use the human body as a host.
What are the examples of opportunistic entrepreneurs? ›
The opportunistic entrepreneurship describes as identifying, exploiting and performs the upcoming opportunities in the first hand. Examples : FedEx, Arthur Fry and Lan Hanco*ck etc.
What is meant by opportunistic behavior in marketing? ›The process of a business using the Generally Accepted Accounting Procedures for the purpose of altering their earnings figures in hopes of attaining a specific desired outcome.
What are opportunistic actions? ›Opportunism is the practice of taking advantage of circ*mstances – with little regard for principles or with what the consequences are for others. Opportunist actions are expedient actions guided primarily by self-interested motives.
What does most opportunistic mean? ›: taking advantage of opportunities as they arise: such as. : exploiting opportunities with little regard to principle (see principle sense 1) or consequences. a politician considered opportunistic.
What are the effects of opportunism? ›opportunism behavior may initially increase outcomes for the opportunistic party, it impedes value creation and decreases revenues for both parties in a relationship (Wathne and Heide, 2000).
Why are entrepreneurs opportunistic? ›Opportunistic entrepreneurship is all about taking what the market gives you. Rather than creating a brand new product category or coming up with some revolutionary technology, you simply identify existing gaps in the market and/or focus on hot trends as they emerge.
What are 5 examples of cultural entrepreneurship? ›Our focus is therefore on entrepreneurs and businesses with a market and customer focus. Some examples are GoCoop, Vahdam Teas, Jaypore, Zouk, Paperboat, and Sarva.