Griffin Capital Corp. is celebrating a $1 billion milestone for its Griffin Institutional Access Real Estate Fund (GIREX). The fund hit that mark in total assets under management well ahead of expectations, a little more than two years after its June 2014 launch date.
Griffin has emerged as a leader in what has the potential to be a growing niche for real estate interval funds. Although interval funds have been around for a long time, real estate interval funds specifically surfaced about five years ago and they are just beginning to gain traction.
Currently, there are only a few active real estate interval funds. However, Griffin’s success is attracting more players. There are a number of new funds in the pipeline that are at various stages in the SEC registration process.
“We certainly expect to see competition increase in the space, which is good because it solidifies the interval fund as a legitimate asset class,” says Randy Anderson, portfolio manager with Griffin Institutional Access Real Estate Fund.
What is an interval fund?
Interval funds are a hybrid vehicle that offers individual investors a combo of liquid and illiquid real estate investments. On one hand, it looks a lot like an open end mutual fund in that it can raise and invest money on a daily basis. Net asset value (NAV) calculations also are done on a daily basis. Yet, similar to private equity funds, interval funds do not provide liquidity on a daily basis. In most cases, liquidity is provided on a quarterly basis. And because the fund does not have to provide liquidity on a daily basis, fund managers can use different types of public and private securities to build a portfolio.
As its name suggests, GIREX aims to give individual investors direct access to institutional investments. The fund is investing in very large—very expensive—private funds, including the likes of BlackRock Granite, Sentinel Real Estate Fund and Clarion Lion Properties Trust. Those private funds and non-traded REITs represent 70 to 90 percent of the fund’s investments, while the remaining 10 to 30 percent is invested in public REITs .“There has been a lot of research that shows that mixing public and private REITs together leads to very strong diversification benefit and really good risk adjusted returns,” says Anderson.
Growing niche market
A number of factors have helped accelerate the fund’s growth, including strong risk-adjusted returns. Its dividend yield is currently at 5.22 percent, with an average annualized return around 8.5 percent. GIREX has benefitted from the broader “flight to quality” trend, with investment capital flowing to top sponsors and experienced management teams.
In addition, the fund has likely received an added boost from some of the challenges plaguing non-traded REITs, including new regulatory requirements and a backlash from investors on its traditionally high fee structures.
“When we started looking at the product, we were definitely looking at them as a potential alternative to the non-traded REIT,” says Michael Pagano, an executive vice president of compliance, legal and risk assessment at 1st Global, a wealth management firm.Investors are considering interval funds as an alternative to non-traded REITs. They like the hybrid quality that combines private and public investments—or illiquid and liquid sleeves—into one investment, says Pagano.
The interval funds also help individual investors access institutional quality real estate. Financial advisors such as Pagano are trying to find options for clients that are as close as possible to a direct investment in commercial real estate that individuals can’t achieve on their own with a $20,000 or $30,000 allocation to real estate.
It is likely that both non-traded REITs and interval funds will peacefully co-exist and even complement one another as they appeal to investors for different reasons.The rise of interval funds isn’t a move to edge out non-traded REITs, but it is likely a sign that sponsors are continuing to work to develop new alternatives that appeal to investors.
“I think we will see a lot of these alternatives wrapped in different ways to fit investors’ different investment time horizons, risk-return tolerances and yield expectations,” says Anderson.