Direct Investments' Momentum Continues, Attracting $5.6 Billion in 1Q 2014

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ELLICOTT CITY, Md. and SHREWSBURY, N.J., April 14, 2014 (GLOBE NEWSWIRE) -- Healthy investor demand for public non-listed real estate investment trusts (REITs), non-listed business development companies (BDCs) and other direct participation programs (collectively, direct investments) continued during the first quarter of 2014, according to The Investment Program Association (IPA), a trade association for non-listed direct investment vehicles, and Robert A. Stanger & Company, an independent investment banking firm that specializes in direct investment securities. Data developed by Stanger showed that equity capital flows to direct investments reached $5.6 billion at the end of March, a growth of 14.4% compared to the first quarter of 2013.

"Three primary factors continue to underpin the success of the Direct Investment industry among retail investors and their advisors," said Kevin Gannon, managing director of Stanger. "We believe this relatively young industry will see substantially higher levels of investment in coming years because these factors will prevail for the foreseeable future."

First, liquidations and listings of non-listed REITs formed in prior years have produced attractive total returns to investors. Second, in the current low-rate environment, investors are attracted to the yield advantage of real estate and corporate development loans over more traditional fixed income investment alternatives. These yields are typically 6% or more. Third, continued macro-economic uncertainties and their potential impact on the stock market makes portfolio diversification attractive to investors.

External Forces Contributing To Investor Demand

According to Stanger, forces both inside and outside the direct investment industry are contributing to this robust investment growth. Continued investor uncertainty regarding government fiscal, monetary and tax policies and their implications for long-term inflation, continues to boost investors' attraction to investments backed by hard assets. This momentum has also been increased by the low interest rates offered by fixed-income instruments. Despite the strength of last year's equity market, the stock market had rocky times in the months early in the year, reminding investors of earlier "401(k) meltdowns" and causing investors to remain cautious in their capital commitment to equities.

"With their higher-than-average current income and low correlation to stocks, bonds and other financial instruments, direct investments remain attractive in the current low-rate environment," said Kevin M. Hogan, President and Chief Executive Officer of the Investment Program Association. "Investors are gravitating to reliable current income, rather than speculative growth, and purchasing direct investments."

The positive outlook for economic fundamentals of the two largest categories of direct investment – non-listed REITs and business development companies (BDCs) – has also contributed to direct investment volumes. "For REITs, the steady improvement in U.S. economic conditions and employment are providing the necessary reinforcement for increased occupancy and rental rates. For real estate owners and developers, the near-record low interest rate environment translates into highly attractive leverage opportunities," said Keith D. Allaire, Managing Director of Stanger. "For BDCs, that positive economic growth provides investment opportunities to finance growing businesses at a time when lending from traditional sources still remains below historical levels."

Another external factor increasing the attractiveness of direct investments is the secular trend in retirement investment and saving. "With an average of 10,000 Baby Boomers retiring daily and the overall migration of retirement funding from employers to individuals, retirees and pre-retirees need to focus on income-oriented investments. Asset allocation, diversification and inflation-resistant income have great importance to active retirees and are fundamental drivers of the non-listed REIT industry," said Hogan.

Internal Industry Events & Improvements Drive Investor Demand

While external forces remain conducive to increased capital flows to direct investment products, events and product improvements within the direct investment industry are clearly providing a powerful impetus for growth. A sizable flow of completed successful liquidity events have demonstrated the ability of public non-listed REITs to provide investors with both high income and attractive capital growth. Stanger credits a significant part of the increase in fundraising to the reinvestment of proceeds received by investors from matured programs that have provided liquidity to their shareholders either by selling their portfolios or through exchange listing of their stock.

Approximately $3.0 billion of these liquidity events occurred in the first quarter of 2014, with the pace expected to accelerate to over $10 billion in the first half of this year. "It's a virtuous cycle: Investors who receive relatively high current income from a non-listed REIT during its ramp up and operational period, and then an attractive capital gain upon program liquidation are obviously inclined to re-commit a portion of the liquidation proceeds to a similar investment," said Gannon.

In addition to examples of positive full-cycle investment performance, the industry has evolved to provide a more diversified suite of products and is working to elaborate product design to appeal to a broader range of investor needs and preferences. Target real estate assets represented among non-listed REIT offerings are more varied than ever before, and include niche asset classes (such as healthcare, data centers, hotels, self-storage, and land), global property acquisitions, and a variety of real-estate related debt instruments. The emergence of multi-share class offerings, while still in its infancy, will enable investors to choose among alternative ways to defray distribution costs in much the same way as they can when investing in multi-class mutual funds. The direct investment industry has also expanded considerably due to the addition of non-listed BDCs.

Despite the investor demand and level of fund raising, broker-dealers continue to apply robust due diligence procedures to review product offerings and monitor marketing processes In February, the IPA, in partnership with AI Insights, introduced a new state-by-state compliance tool, the AI Insight Daily Blue Sky Report, which assists broker-dealers to routinely monitor and limit the concentration of any individual investor's net worth in direct investments. With the dramatic expansion of industry fundraising coupled with the capital recycling from recent successful liquidity events, broker-dealers also are monitoring the aggregate investment by their entire client base in any one individual offering to insure sufficient product diversification on their platforms.

Non-Listed REITs and BDCs Lead Capital Raising

Non-listed REITs attracted approximately 75% of direct investment capital, raising over $4.1 billion in the first quarter of 2014 – an increase of 5.6% compared with first quarter 2013. (See table below.) Currently, 43 public, non-listed REIT offerings are registered to raise $62.6 billion in equity capital.

The sector with the greatest momentum in base fundraising growth is non-listed BDCs. First quarter investment in BDCs topped $1.4 billion, a 53% increase above the $938 million raised in the first quarter of 2013. BDCs accounted for 25% of all direct investment fundraising in the first quarter. At current investment rates, fundraising by BDCs will have nearly quadrupled since 2011. Currently, 10 non-listed BDC offerings are registered to raise more than $14 billion.

Among the top ten fundraising sponsors so far this year, one is a BDC sponsor, three offer both BDCs and Non-listed REITs and six offer only real estate products.


* Most direct participation programs and non-listed REITs available today offer the average investor a way to own economic interests in tangible assets such as institutional quality real estate, oil and gas reserves, and equipment. These underlying assets tend to respond to broad economic and capital market changes differently than exchange-traded stocks. BDCs provide financing to small and mid-sized businesses, and in recent years have sought to capitalize on the relative lack of sufficient debt capital relative to demand in these markets.

Investment In Publicly Registered DPPs, Non-Listed REITs & BDCs
Through March 31, 2014
($ in millions)
1Q 1Q %
2014 2013 Chg
Mortgage Non-Traded REITs 189.8 234.2 -19.0%
Equity Non-Traded REITs 3,992.7 3,725.2 +7.2%
Mortgage - LPs/LLCs 0.9 0.3 +200%
Total Real Estate $4,183.5 $3,959.6 +5.7%
EQUIPMENT LEASING 13.1 37.3 -64.9%
BDCs 1,432.2 937.9 +52.7%
Oil & Gas 4.0 0.4 +900%
Other 12.1 0.0 --
TOTAL SALES $5,644.9 $4,935.2 +14.4%
Source: Robert A. Stanger & Company, Inc., Shrewsbury NJ

Robert A. Stanger & Co., Inc., a Shrewsbury, New Jersey-based investment banking firm specializing in real estate and direct participation program securities, provided the fundraising data cited herein. The company is a leading source of information and research on the direct investment industry and is regularly involved in real estate mergers and acquisitions, debt and equity financings, real estate appraisals and securities valuations. Stanger is also the publisher of The Stanger Report, Stanger's Market Pulse, and The Stanger Digest, publications focused on the direct investment industry.

The Investment Program Association (IPA) was formed in 1985 to provide effective national leadership for the direct investment industry. The IPA supports individual investor access to a variety of asset classes not correlated to the traded markets and historically available only to institutional investors. These investments include public non-listed REITs (NLREITs) and Business Development Companies (BDCs), Energy and Equipment Leasing Programs, and private equity offerings. For the last 28 years, the IPA has successfully championed the growth of such products, which have increased in popularity with financial professionals and investors alike. Direct investments are held in the accounts of more than 2 million individual investors. The mission of the IPA is advocating direct investments through education. Access the wealth of IPA educational materials here, or visit the IPA online for more information about becoming a member.

To stay up-to-date with IPA news, follow @IPADirectInvest on Twitter.

CONTACT: MEDIA CONTACT: John McInerney | Makovsky | 212.508.9628 | ORGANIZATION CONTACT: Stanger Contact: Kevin T. Gannon | Managing Director | (732) 389-3600 x274 |

Source:Investment Program Association