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Direct Investment Program Industry Continues to Attract Record Levels of Investment

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ELLICOTT CITY, Md., and SHREWSBURY, N.J., July 30, 2013 (GLOBE NEWSWIRE) -- The momentum toward increased 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 to build during the first half of 2013 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. Based on data developed by Stanger, equity capital flows to direct investments reached almost $1.9 billion in June, pushing first-half 2013 investment to over $10.7 billion – a 65% increase compared with the same period in 2012 and the highest half-year total on record for the industry.

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 policy and their implications for long-term inflation, is fueling investors' attraction to investments backed by hard assets. This momentum has also been increased by the low interest rates available from fixed-income alternatives. And while the stock market produced attractive returns in 2012 and so far this year, memories of earlier "401(k) meltdowns" linger and have kept investors cautious in their capital commitment to traded equities.

"Investors in today's yield-starved environment are eager for sources of above-average income and for the portfolio diversification provided by investments in hard assets and smaller companies," said Kevin M. Hogan, President and Chief Executive Officer of the Investment Program Association. "These external concerns will continue to underpin investment in the second half of 2013."

The positive outlook for economic fundamentals of the two largest categories of direct investment – non-listed REITs and BDCs – has also contributed to direct investment volumes. "For REITs, the gradual but steady improvement in U.S. economic conditions and employment are providing the necessary underpinnings for increased occupancy and rental rates. And the near-record low interest rate environment has provided highly attractive positive leverage opportunities for real estate owners," said Kevin Gannon, Managing Director of Stanger. "For BDCs, U.S. 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. "The migration of retirement funding from employers to individuals, the focus of retirees and pre-retirees on income-oriented investments, the expanding recognition of the importance of asset allocation, and the appeal of inflation resistant income to active retirees 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. Several recently completed successful liquidity events have demonstrated the ability of public non-listed REITs to provide investors with both high income as well as attractive capital growth in an otherwise challenging economic environment. Stanger credits a significant part of the increase in fundraising to the "recycling" of proceeds received by investors from matured programs which have provided liquidity to their shareholders either by selling their portfolios or through exchange listing of their stock.

Approximately $3.6 billion of such liquidity events occurred in the second half of 2012, with the pace accelerating to over $11 billion through the first half of 2013. "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 Keith D. Allaire, Managing Director of Stanger.

In addition to examples of positive full-cycle investment performance, the industry is evolving a more diversified suite of products and working to improve 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, self-storage, and land), global property acquisitions, and a variety of real-estate related debt instruments. The emergence of multi-share class offerings is enabling investors to choose among alternative ways to defray distribution costs in much the same way as multi-class mutual funds do.

The direct investment industry has also expanded considerably due to the addition of non-listed BDCs. In addition, management choices are expanding for investors as more high quality asset management companies recognize the importance of accessing retail investment capital. During the past 18 months, 12 new advisors have offered non-listed REIT or BDC products.

Although increased investor demand and fundraising is good news for the sponsors and broker-dealers alike, broker-dealers are nevertheless exercising caution. "They are taking steps to insure that the momentum does not turn into an imprudent, Pamplona-style stampede," said Allaire. Broker-dealers routinely monitor and limit the concentration of any individual investor's net worth in direct investments. But with the dramatic expansion of industry fundraising coupled with the capital recycling from recent successful liquidity events, some individual offerings have garnered increasing shares of the alternative investment allocations within broker-dealer systems. In response, some broker-dealers are evaluating, and where deemed appropriate, limiting the aggregate investment by their entire client base in any one individual offering in order to diversify the dependence of the broker-dealer's aggregate advisory services on the ultimate performance of any one product.

Non-Listed REITs and BDCs Lead Capital Raising

Non-listed REITs attracted approximately 80% of direct investment capital, raising over $8.5 billion in the first half 2013. Investment in public non-listed REITs increased approximately 72% compared with first half 2012, in large measure due to the re-investment of liquidation proceeds. Nine of the top 10 leading fundraisers so far this year are real estate sponsors. Currently, 40 public, non-listed REITs are in the market and actively seeking to raise $69 billion in equity capital.

The sector with the most momentum in base fundraising growth is non-listed BDCs. Through the first-half investment in BDCs topped $2 billion, a 47% increase above the $1.4 billion raised in the first-half 2012. BDCs accounted for 19% of all direct investment fundraising in the first half. At current investment rates, fundraising by BDCs will have nearly tripled since 2011. Currently, nine non-listed BDCs are in the market and actively seeking to raise more than $11 billion.

Investment In Publicly Registered DPPs, Non-Listed REITs & BDCs
($ in millions)

1st Half
2012
1st Half
2013
%
Chg
REAL ESTATE
Mortgage Loan LPs/LLCs 1.8 0.7 -60%
Equity NL-REITs 4,628.8 7,787.1 +68%
Mortgage NL-REITs 343.2 784.3 +129%
Total Real Estate $4,973.8 $8,572.1 +72%
EQUIPMENT LEASING 108.8 71.3 -35%
BDCs 1,398.3 2,059.0 +47%
OIL & GAS / MISC. 0.0 4.4 N/A
TOTAL SALES $6,480.9 $10,706.8 +65%

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, including Non-Listed REITs (NLREITs), Business Development Companies (BDCs), Oil and Gas, and Equipment Leasing Programs. 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. It is estimated that at as of June 30, 2013, direct investments are held in the accounts of more than 1.5 million individual investors. The mission of the IPA is advocating direct investments through education. Request your free copies of the Guide to Understanding Direct Investments and take the free IPA e-learning course today, 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 | jmcinerney@makovsky.com ORGANIZATION CONTACTS: Stanger Contact: Kevin T. Gannon | Managing Director | (732) 389-3600x274 | kgannon@rastanger.com

Source:Investment Program Association