Vintage Risk in Closed-End Fund Structure

Many private real estate strategies are set up as closed-end vehicles.  Typically, this means the fund has a finite period of time within which to raise capital, invest in properties, and then sell properties.  Under this structure, managers typically make the majority of their acquisitions over a one- to three-year period and hold properties for two to four years.  A large portion of investors’ return is often generated when the properties are sold.  This puts a large emphasis on selling at a higher price than the original purchase price. 

In this scenario, investors take on what is commonly referred to as “vintage risk.” Vintage risk is the risk that a large portion of the properties are acquired during a period of high prices, making it difficult to sell them for a gain in the future.  Because the properties were purchased within a concentrated period of time and the investors expect to get their capital back within a defined horizon, the managers may be limited in what they can do to offset this risk. 

In contrast to closed-end funds, open-end funds take in capital on an ongoing basis; generally, there is no defined investment period.  This fund structure may help reduce potential vintage risk as properties are acquired on an ongoing basis and do not need to be sold by a certain period in order to return capital to investors.  An open-end structure may be more attractive to real estate investors who are considering an allocation to real estate but are concerned about potential vintage risk. 

 

Rank Dawson, CFA

Vice President, Portfolio Consultant

 

The views expressed herein are presented for informational purposes only and are not intended as a recommendation to invest in any particular asset class or security or as a promise of future performance.