Real estate private index fund systems and methods

Abstract

Systems and methods for creating and administering and a real estate private index fund as a single investable instrument which tracks a non-investable real estate index of open-ended funds with minimal tracking error.

Description

RELATED APPLICATIONS[0001]This application is related to U.S. Provisional Application No. 61 / 839,988, filed Jun. 27, 2013.FIELD OF THE INVENTION[0002]The present disclosure and related inventions pertain generally to computer-implemented systems and methods for providing novel investment opportunities, and more specifically to investments related to indexing private real estate investments and investments in private real estate funds.BACKGROUND[0003]There are a number of non-investable private real estate indices which are published by organizations such as IPD, NCREIF, NAREIT and PREA, These indices track and report on the aggregate performance of individual private open-ended real estate investment funds, referred to herein as “Component Funds”. Component Funds are available to qualified investors for investment on an individual basis. A single instrument that weights the Component Funds with respect to their percentage of the index and adjusts the weightings based on market value...

AI Technical Summary

Benefits of technology

[0013]The real estate private index fund (also referred to herein as “private index fund” or “index fund”) of the present disclosure, and related systems and methods, provides an investable instrument for replicating or tracking the performance of a real estate index by rebalancing the weightings of the Component Funds of an index based on quarterly market values. The real estate private index fund provides additional liquidity above the Component Funds liquidity given that investors can enter and exit the real estate private index fund similar to a Component Fund, and allows investors the ability to generate market rate returns with minimal variance from index returns.

[0015]The real estate private index fund of the disclosure also provides investors the ability to track the Component Funds and ultimately the index return within a specified range of tracking error, and provides a market value for transfer of interests based on Component Fund valuations on a quarterly basis.

[0016]Various and preferred embodiments of the systems and methods of the disclosure provide investment products as well as techniques and supporting systems for creating, offering and managing real estate private index funds. By use of the systems and methods of the present disclosure, investors, as well as advisors on behalf of their clients, may allocate capital to institutional grade commercial real estate investments through a quarterly valued investment vehicle that offers quarterly purchases and quarterly redemptions but that is not actively traded on any open market. The real estate private index fund provides the benefits to investors of greater diversification and reduced volatility of real estate investment, and the relative illiquidity of real estate offerings is substantially increased and managed by the real estate private index fund structure designed to provide greater liquidity through quarterly valuations, purchases and redemptions. The relative lack of transparency in valuation of commercial real estate products is substantially eliminated by the systems and methods of the present disclosure and by the novel detailed valuation methodology and use of independent valuation expertise in connection with “rolling” valuations of real estate and real estate-related assets and liabilities of the Component Funds. The methodology of the present disclosure accommodates use by individual investors as well as investment advisors in ongoing portfolio allocation strategies, rather than for one-time acquisition of a Component Fund. Typical ongoing usage events include portfolio rebalancing, systematic investments, and systematic withdrawals as further described.

[0018]Therefore, in one aspect, a computer-implemented system and method for creating and pricing shares of an open-ended, unlisted real estate private index fund includes a system for executing contributions and distributions and a detailed process for executable instructions. Executing the instructions results in the implementation of an appraisal or valuation module that facilitates the determination of real estate pricing data based on a periodic appraisal of illiquid or generally illiquid real estate assets held in the real estate investment vehicle and a pricing module that combines the real estate pricing data with pricing data related to liquid securities held by the real estate investment index and accrued expenses, resulting in a net asset value NAV of the real estate private index fund. Preferably, the systems and methods of the disclosure do not dilute or unbalance positions in the real estate private index fund.

[0019]In another aspect a computer-implemented method for redeeming shares of an open-ended, unlisted real estate investment private index fund includes providing electronic access to an applications server on which computer-based reallocation models are stored and that, when executed by an active portfolio manager, facilitates the pricing and managed redemption and contributions of the real estate investment private index fund and the Component Funds. The pricing, redemption and contribution of the fund includes calculating real estate pricing data based on a periodic appraisal of illiquid or generally illiquid real estate assets held by Component Funds and combining the real estate pricing data held by the Component Funds and accrued expenses, resulting in a real estate private index fund net asset value (NAV).

Problems solved by technology

The queues limit the ability of an investor to rebalance in a timely fashion given the lag the queues may create for entering or exiting the Component Fund.

First, the NPI was not investible, whereby investors would be incapable of replicating the index performance since such a large percentage of the investment universe was held in single investor accounts.

Lastly, the NPI tracked unleveraged real estate returns, which was inconsistent with the leverage profile of many real estate investors.

Despite the fundamental improvements in benchmarks and indices, private real estate has never had an investable index product such as many other assets classes, (e.g., stocks, bonds, and commodities which all have indexing funds).

To date, the difficulty of having an investable index has been related to a number of factors including, (i) the amount of investment capital required to invest in each Component Fund is significant, (ii) entrance and withdrawal queues for Component Funds, and (iii) rebalancing an investment that provides limited liquidity (e.g., quarterly).

There are currently no investable “beta” strategies or index products private real estate investment.

While these types of products are readily available for liquid investment securities, such as stocks and bonds, alternative products, such as private real estate or private equity, do not provide investors index product offerings.

However, calculating an NAV for a fund that holds commercial real estate assets is much harder, as there is no market with listed securities type liquidity for the assets.

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