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Waiting to Be Called: The Impact of Manager Discretion and Dry Powder on Private Equity Real Estate Returns

In this article, the authors investigate the performance sensitivity of private equity real estate (PERE) funds to capital deployment speeds, investment horizons, management fees, and investor opportunity costs from uncalled capital. The authors first provide a series of simulation scenarios demonstrating the significant effects of these factors on PERE performance and then use PERE fund data to empirically investigate their performance effects. Using a comprehensive dataset from Cambridge Associates covering a large sample of 497 funds sponsored by 201 managers with aggregate assets under management of $383.9 billion from 2000–2013, the authors find that capital deployment speeds vary significantly across funds and over time and that very little of this variation is incorporated in traditional performance metrics. Importantly, the dilutive effects of management fees are positively related to the time over which capital is deployed and negatively related to the percentage of net capital called from investors and deployed by the fund manager. The authors also model the significant opportunity cost investors incur when reserving funds for uncertain capital calls. This cost of maintaining dry powder for the manager is ignored in reported performance metrics. Taken together, the authors’ results show the importance of accounting for capital deployment speeds, investment horizons, management fees, and uncalled capital in determining PERE fund performance.