i 
 

 

THE PERFORMANCE OF REAL ESTATE PRIVATE EQUITY 

FUNDS IN SOUTH AFRICA 

 

FEBRUARY 2020 

 

 

ZAIN OMAR (685744) 

MASTERS OF MANAGEMENT IN FINANCE AND 

INVESTMENT (MMFI) 

WITS BUSINESS SCHOOL 

 

 

 

 

  



 
 

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TABLE OF CONTENTS 

TABLE OF FIGURES ............................................................................................................ v 

LIST OF TABLES .................................................................................................................. vi 

1 INTRODUCTION ........................................................................................................... 1 

1.1 Introduction ............................................................................................................. 1 

1.2 Background of the study ......................................................................................... 1 

1.2.1 What is a real estate private equity fund? ................................................................ 3 

1.2.2 Determinants of successful establishment of the funds: ........................................ 4 

1.2.3 Types of Real Estate Private Equity Funds .............................................................. 5 

1.2.4 Factors that affect fund performance ........................................................................ 6 

1.3 Research problem................................................................................................... 7 

1.4 Objective of the study ............................................................................................. 7 

1.4.1 Research Questions .................................................................................................... 8 

1.5 Potential benefits/significance of the study .............................................................. 8 

1.6 Limitations .............................................................................................................. 8 

1.7 Overview of data and methodology ......................................................................... 8 

1.8 Outline of the study ................................................................................................. 9 

2 LITERATURE REVIEW .................................................................................................. 9 

2.1 Introduction ............................................................................................................. 9 

2.2 What is a fund? ....................................................................................................... 9 

2.2.1 The advantages of a fund as an asset class? ....................................................... 11 

2.2.2 Defining private equity ............................................................................................... 12 

2.2.3 Define real estate investment as an asset class? ................................................. 13 

2.3 Special features of real estate as an asset class in a private equity setting ........... 15 

2.3.1 REPE fund type and goals ........................................................................................ 15 

2.3.2 REPE fund structure .................................................................................................. 16 

2.3.3 Personnel ..................................................................................................................... 17 

2.3.4 REPE fund economics ............................................................................................... 17 

2.4 The benefits of real estate as an asset class in a private equity setting ................. 18 

3 CHAPTER 3: METHODOLOGY ................................................................................... 21 

3.1 Introduction ........................................................................................................... 21 

3.2 Research paradigm ............................................................................................... 21 

3.3 Research design ................................................................................................... 22 

3.4 Research methods ................................................................................................ 23 

3.5 Research horizons ................................................................................................ 24 

3.6 Population and sampling ....................................................................................... 24 

3.6.1 Unit of analysis ........................................................................................................... 24 



 
 

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3.6.2 Sampling methods...................................................................................................... 25 

3.6.3 Sampling procedure ................................................................................................... 25 

3.6.4 Sample size ................................................................................................................. 25 

3.7 Data collection ...................................................................................................... 25 

3.7.1 Primary data collection .............................................................................................. 26 

3.7.2 Secondary data ........................................................................................................... 26 

3.8 Data analysis ........................................................................................................ 26 

3.8.1 Descriptive tests ......................................................................................................... 26 

3.8.2 Pearson correlations .................................................................................................. 26 

3.8.3 The Jensen’s alpha test ............................................................................................ 27 

3.9 Reliability and validity ............................................................................................ 27 

3.9.1 Pilot testing the data collection tool ......................................................................... 28 

3.9.2 Validity .......................................................................................................................... 28 

3.10 Ethical consideration ............................................................................................. 28 

3.10.1 The right to anonymity and confidentiality .............................................................. 28 

3.10.2 The right to informed consent and voluntary participants .................................... 29 

3.10.3 Protection from harm ................................................................................................. 29 

3.11 Conclusion ............................................................................................................ 29 

4 CHAPTER 4: DATA ANALYSIS AND INTERPRETATION ........................................... 30 

4.1 Introduction ........................................................................................................... 30 

4.2 Description of the funds ........................................................................................ 30 

4.2.1 Firms fund sizes.......................................................................................................... 31 

4.2.2 Real estate categories ............................................................................................... 32 

4.2.3 Investments by province ............................................................................................ 33 

4.3 Perceptions on factors affecting fund performance ............................................... 34 

4.4 The impact/effect of the experience of firm ........................................................... 35 

4.5 External risk perceptions ....................................................................................... 37 

4.6 REPE performance ............................................................................................... 37 

4.6.1 Jensen’s Alpha ........................................................................................................... 38 

4.7 General management fees for the funds ............................................................... 40 

4.8 Performance incentive fee .................................................................................... 41 

4.8.1 General expected initial yields .................................................................................. 42 

4.8.2 Residential ................................................................................................................... 42 

4.8.3 Commercial ................................................................................................................. 42 

4.8.4 Offices .......................................................................................................................... 43 

4.8.5 Mixed-use developments .......................................................................................... 43 



 
 

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4.8.6 Healthcare ................................................................................................................... 43 

4.8.7 Student accommodation............................................................................................ 43 

4.9 Risk classification.................................................................................................. 44 

4.10 Relationship between returns and selected indicators ........................................... 45 

4.11 Fund performance and partner effect .................................................................... 47 

5 CONCLUSION AND RECOMMENDATIONS ............................................................... 49 

5.1 Introduction ........................................................................................................... 49 

5.2 Conclusions to research questions ....................................................................... 49 

5.2.1 Research question 1 .................................................................................................. 49 

5.2.2 Research question 2 .................................................................................................. 49 

5.2.3 Research question 3 .................................................................................................. 50 

5.2.4 Research question 4 .................................................................................................. 50 

5.3 Recommendations ................................................................................................ 50 

5.4 Limitations of the study ......................................................................................... 50 

5.5 Conclusion ............................................................................................................ 51 

 

 

  



 
 

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TABLE OF FIGURES  

Figure 4.1: What is the average size (in ZAR) of the real estate private equity funds that are 

formed by the firm? ............................................................................................................. 32 

Figure 4.2: What are the key factors that affect fund performance? .................................... 35 

Figure 4.3: Targeted return versus actual return ................................................................. 38 

Figure 4.4:Ten-year IPD South African All-Fund Universe Indices (Benchmark) ................. 39 

 

  



 
 

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LIST OF TABLES 

Table 3.1: Differences between qualitative and quantitative methods ................................. 23 

Table 4.1: Description of the funds ...................................................................................... 31 

Table 4.2: Which categories of real estate assets does the fund invest in? ......................... 33 

Table 4.3: Which geographic locations does the fund invest in? ......................................... 34 

Table 4.4: The effect/impact of experience .......................................................................... 36 

Table 4.5: In descending order, what would you consider to be the three most significant 

risks that affect the performance of the REPE fund? ........................................................... 37 

Table 4.6: Summary of lock-in periods, benchmarks and annual returns…………………….39 

Table 4.7: Jensen's Alpha calculations ................................................................................ 40 

Table 4.8: Expected initial yields versus IPD all-assets benchmark ..................................... 43 

Table 4.9: In terms of risk, how would you classify the above-mentioned categories of real 

estate assets? ..................................................................................................................... 44 

Table 4.10: Correlations - Actual returns ............................................................................. 45 

Table 4.11: Pearson correlation: targeted versus actual returns ......................................... 46 

Table 4.12: Funds performance and partner effect .............................................................. 47 

 

 

 

 

 

 

 

 

 

 

 

 

 



 
 

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ABSTRACT 

Using a sample of seven real estate private equity funds in South Africa, we firstly investigate 

the actual performance of these funds relative to their targeted returns at inception, and the 

performance of the market over the holding period. Results indicate that South Africa’s REPE 

funds were able to meet and surpass their targeted returns, including those that were promised 

to prospective clients during the prospectus stages. Furthermore, REPE performed above 

market expectations and were able to exceed market returns. 

1 INTRODUCTION 

1.1 Introduction 

This research paper will provide a brief background of the recent performance of real estate 

private equity funds. The paper will explain what a real estate private equity fund is, its 

structure and the key considerations accounted for during its establishment. Thereafter, the 

various types of private equity funds are explained, and the factors that affect a fund's 

performance. The performance of South African private equity real estate funds will then be 

investigated, using empirical evidence. 

1.2 Background of the study 

Real estate private equity funds are an investment vehicle for both institutional investors and 

high net-worth individuals. They generally exhibit a high risk/high return profile, usually driven 

by redevelopment ‘turnaround’ properties. Additionally, real estate private equity is one of the 

fastest-growing segments of the real estate asset class over the last two decades, 

internationally. Globally, equity commitments increased from under $5 billion (USD) in 1993 

to over $100 billion by 2005 (Preqin, 2019). In the USA and Europe, these funds have 

progressively gained traction over the last 25 years.  Thus, a quantitative analysis of their 

performance is possible. The targeted net equity returns on investments decreased from 20% 

and above in the 1990s to between 15% to 20% (Preqin, 2019).  However, the number of 

funds being established, and the total equity capital raised are continuously rising (Hahn, 

Geltner and Gerardo-Lietz, 2005). 

Investors globally have increased their investments in alternative real estate investment 

vehicles over the last decade, specifically through private equity real estate funds. According 

to data collected by Preqin (2019), private real estate assets under management has 

experienced positive growth over the last ten years, with a record high of $909 billion (USD) 

as of June 2018. Of the $909 billion (USD) invested, approximately 80% of investments have 

been directed to three types of real estate private equity funds being opportunistic funds (36% 



 
 

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or $327 billion), value-added funds (25% or $231 billion) and distressed debt funds (18.5% or 

$168 billion) (Preqin, 2019). Based on the types of funds which are enjoying the lion’s share 

of investment, investors have high-risk tolerance and are interested in pursuing high returns 

(Preqin, 2019).  

Furthermore, investors have a long-term view on the asset class and focus on achieving 

capital appreciation. The data collected shows that net cash flows to limited partners 

weakened between the period 2016 and 2018, as the average distributed amount from the 

investments decreased from $95.7 billion to $19.6 billion (Preqin, 2019).  

The data collected also reveals that the rate at which these funds have been raised over the 

last four years (2015 to 2018) has slowed. However, there has been a consolidation of capital 

which has gone into the hands of fewer managers who are responsible for investment 

decisions. Despite fundraising by general partners being more challenging, the current outlook 

is positive (Carr, 2019). However, over the next five years, total investments in real estate 

private equity funds are expected to grow 50% to approximately $1.2 trillion by 2023. In 

particular, emerging markets are expected to present the best opportunities over the period 

with family wealth expected to drive the growth. Considering that high-net-worth individuals 

and families generally constitute a large portion of private equity funding, it provides a positive 

indicator of growth for existing and new funds in emerging markets (Preqin, 2019). 

The demand for private equity real estate funds as an investment vehicle can be measured 

by comparing the size of the fund achieved post-fundraising to the targeted amount 

determined by the sponsor at the beginning. Additional factors that determine the demand for 

specific funds include historical returns. Favourable historical returns can attract new investors 

who wish to take advantage of potential opportunities, and increase the commitments of the 

existing investors in the asset class. 

Real estate is a physical asset that provides passive income but requires continuous 

management of facilities. Its income stream is governed by lease agreements that can be 

long-term or short-term in nature, depending on the asset in question (Tomperi, 2010). As with 

all asset classes, the prevailing macroeconomic performance and capital markets, both locally 

and globally, influence the performance of real estate. Real estate performance is widely 

accepted as cyclical in nature. Local supply and demand factors and market conditions 

contribute to the performance of rental growth and property yields (Tomperi, 2010). 

Fundraising is positively correlated to the performance of the underlying real estate investment 

markets. The positive correlation implies that there is a greater amount of capital raised and 

an increase in the number of funds when real estate values rise (Tomperi, 2010). 



 
 

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Real estate is a capital-intensive asset class with a long lead time or holding period. Hence, 

the geopolitical landscape, and current and expected future interest rates, affect investor 

confidence, their appetite for the asset class and the performance of the sector. There is a 

negative correlation between investor confidence and their respective investments in funds, 

relative to interest rates and the geopolitical landscape. 

The benefits of the asset class include diversification and the reduction of the overall risk in a 

multi-asset portfolio, providing a hedge against inflation and providing favourable returns 

which in most cases exceed that of bonds and are comparative to the returns on equities 

(Tomperi, 2010). 

1.2.1  What is a real estate private equity fund? 

A real estate private equity fund is a closed-end limited liability partnership that is established 

to raise equity for ongoing real estate investment opportunities. The fund takes on a structure 

similar to an English LP or Luxembourg Fonds Common de Placement (Tomperi, 2010). A 

real estate private equity fund is founded by general partners (GPs). GPs are also referred to 

as sponsors, who may provide a portion of the equity capital. However, sponsors are 

responsible for securing the bulk of the fund’s equity from investors who are referred to as 

limited partners (LPs). These funds, and the funds secured from traditional lenders (such as 

banks), are invested in property development and property acquisition opportunities (Tomperi, 

2010). 

GPs have an active role in the fund. They are responsible for the establishment and 

management of the fund, identifying real estate opportunities, securing funding and the 

execution of the identified opportunities. GPs share in the profits of the fund and earn fees 

based on the fund’s performance (deRoos and Bond, 2019).  

The sponsoring organisation acts as the GP, and it usually has an agreement with a 

management company. The management company’s role is to act as an advisor to the GP 

and the fund as a whole. Additionally, the majority of the fund’s management team is employed 

by the management company (Tomperi, 2010). However, LPs are passive investors that 

provide the majority of the fund’s equity. The amount of capital invested by LPs is equivalent 

to a prespecified amount committed in a subscription document. The prespecified amount is 

determined during the fundraising period, which can last up to 12 months (deRoos and Bond, 

2019).  

The fundraising commitments are usually invested across 10 to 20 real estate investment 

opportunities for a period of 3 to 4 years from the date of fundraising. The holding period 



 
 

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thereafter ranges between 2 to 5 years. These timeframes depend on several factors such as 

the fund’s investment strategy, market conditions and the cyclical nature of the asset class.  

Real estate private equity funds prefer investing in assets where the sponsor can actively 

increase value over a short period, after which the asset is sold. The primary focus of returns 

is capital appreciation as opposed to the income-based return of ‘core’ real estate (Hahn, 

Geltner and Gerardo-Lietz, 2005). The investment objective of real estate private equity funds 

results in sponsors taking on a role as a trader or value enhancer, instead of an operator. The 

extent of focus on capital appreciation versus income-based returns varies between different 

funds and their respective general partners (Hahn, Geltner and Gerardo-Lietz, 2005).  

LPs receive their original capital outlay back together with potential capital gains or losses that 

would have been realised when the assets are sold. The excess returns that are achieved by 

real estate private equity funds are viewed as compensation for the illiquid nature of the asset 

class and long holding period associated with it (Tomperi, 2010). 

1.2.2 Determinants of the successful establishment of the funds: 

1. The fund must have a clear, well-defined investment strategy. This strategy should 

define the geographic locations and sectors of real estate that will be invested in; the 

risk profile of the investments; leverage that will be used; and the expected return that 

the fund is targeting.  

 

In certain cases, experienced sponsors with good reputations can raise funds for ‘blind 

pools’, wherein no specific investments have been identified at the time of fundraising. 

However, this is not the case for first-time sponsors (deRoos and Bond, 2019).  

 

2. The fund has a required amount of capital, including organisational fees. Traditionally, 

in developed markets, $20 million (USD) is considered to be the minimum amount 

required for a real estate private equity fund. However, the emergence of crowdfunding 

platforms recently reduced this figure. This required figure may also vary depending 

on the geographic location of the fund and the prevailing market conditions at the time 

of fundraising.  

 

Regarding organisational fees, the amount required is usually proportionate to the size 

of the fund. GPs are required to provide these funds during the fund formation process 

to cover costs, including but not limited to, company formations, legal fees, accounting 

fees, regulatory costs and marketing costs. In developed markets, the figure is 

approximately $400 000.00 (USD). 



 
 

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The size of the fund should be sufficient to provide for the potential deal stream of the 

GP to ensure that the required returns are achieved (deRoos and Bond, 2019). 

 

3. Sponsors/GPs must have realistic expectations regarding the amount of time, energy 

and seed funding necessary to start a private equity real estate fund. The GPs 

expectations are imperative as the GP is responsible for the majority of the functions 

related thereto. Furthermore, the GP is required to operate within the strict constraints 

set out in the partnership agreement and offering memorandum (deRoos and Bond, 

2019).  

1.2.3 Types of Real Estate Private Equity Funds 

This section is drawn largely from deRoos and Bond (2019). 

There are five typical types of real estate private equity funds. The funds are risk-adjusted and 

listed in ascending order of their risk and return characteristics. 

1. Core Funds invest in high-quality assets (A or P grade), that have stable income 

streams, with minimal vacancies, located in high barrier to entry primary markets. The 

investments are made using conservative leverage. The fund focuses on assets that 

generate high annual rentals, relative to capital appreciation. Holding periods are long, 

with expected returns ranging from 6% to 8%. Examples of core fund markets are New 

York, San Francisco and Hong Kong. 

 

2. Core-Plus Funds are a hybrid of core funds that invest in high-quality assets in 

secondary markets or riskier assets located in primary markets. Moderate levels of 

leverage are used (limited to 50%) to increase the net equity internal rate of return 

(IRR). Due to the increased risk, investors' expected returns range from between 8% 

and 12%. 

 

3. Value-add Funds invest in assets where there is potential for further improvement or 

value-add. Therefore, capital appreciation forms a significant part of the return on the 

investment. Improvement can be achieved in various ways that include re-leasing, 

operational efficiencies, redevelopment of existing properties and the development of 

new properties. The location of the property is a secondary consideration relative to its 

improvement potential. Value-add funds use moderate leverage (limited to 70%) and 

offer net equity IRR to limited partners of between 11% to 15%. 

 



 
 

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4. Opportunity Funds invest in assets with a relatively high risk-to-return ratio. These 

typically include:  

• Redeveloping existing properties that might be outdated, poorly operated or 

vacant. 

• The development of greenfield sites. 

 

These funds target net equity IRR returns for limited partners in excess of 15%. Capital 

appreciation is the dominant return factor, with the bulk of it being realised at the end 

of the holding period. 

 

5. Distressed Debt or Mezzanine Funds do not invest directly in physical real estate. They 

instead purchase senior loans, mezzanine loans or non-rated commercial backed 

mezzanine loans. However, distressed funds are not averse to taking ownership of 

properties in the event of non-performing loans. These funds utilise significant leverage 

to maximise investors’ equity IRR. Returns usually range from 8% to 12%. 

1.2.4 Factors that affect fund performance 

The performance of real estate private equity funds is dependant on the skill and expertise of 

the general partner, and their fee incentives. In addition, the sponsor’s record from previous 

funds is also a factor that could affect performance. Fund structures give GPs residual 

decision-making power. Hence, GPs have the discretion over which investments to commit to 

for the duration of the fund. Limited partners are passive investors with minimal control as to 

how the fund is managed and when capital is paid them (Hahn, Geltner and Gerardo-Lietz, 

2005). 

Furthermore, management performance is a key factor in current and future fundraising. 

Private equity real estate funds are closed-ended. Thus, investors can no longer invest in a 

fund once the capital target has been achieved. Hence, the potential additional investors would 

have to invest in a new fund. A study by Ernst and Young Corporation (2015) states that real 

estate investors are selective when partnering with new funds. In most cases, investors re-

partner with existing sponsors that they have experienced previous success with. The decision 

to re-partner with GPs indicates that the skill, expertise and experience of general partners 

are key to performance (Ernst and Young, 2015).  

In addition to management experience, Ernst and Young (2015) highlighted the importance of 

the fund having a clearly defined and differentiated strategy that is aligned to investors’ 

interests with a clear capital-raising objective (Ernst and Young, 2015). 



 
 

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The types of real estate projects/developments that funds invest in (such as residential, 

commercial, offices, mixed-use, healthcare and student accommodation), will also affect the 

performance of the fund, as each sector provides different yields based on market conditions. 

From a macroeconomic perspective, factors that could affect fund performance include the 

demographics of the areas where investments are made, the prevailing and future economic 

conditions which would affect supply and demand of the asset class, interest rates and the 

geographic location of the properties invested in (Wenner, 2018). 

1.3 Research problem 

The majority of research work on private equity real estate funds has been done in Europe 

and the USA, with minimal research having been done in South Africa. Therefore, investors 

in these markets are more informed about the investment opportunitythat they are investing 

in, compared to South African investors. The limited research on private equity real estate 

funds in South Africa hampers informed investment decision making by South African 

investors. The potential outcomes of uninformed investment decision making by investors 

include investors realising a lower return or loss on an investment, due to lower growth and 

awareness of REPE in South Africa, and investors missing potential opportunities to invest in 

these investment opportunities. 

From an academic point of view, this research paper will contribute towards creating a platform 

for future research into REPE in other African countries aside from South Africa. Furthermore, 

future research could also be directed at researching specific property sectors in geographic 

locations. This will enable investors to make much more informed investment decisions in 

multiple markets. 

1.4 Objective of the study 

The objective of this study is to fill the above-mentioned gap (in subsection 1.3) by giving 

investors an informative perspective of private equity real estate funds in South Africa. The 

study will analyse the performance of South African Private Equity Real Estate (REPE) funds, 

and the extent to which the above-mentioned factors affect performance. This will be done by 

analysing the performance of various South African (REPE) funds, their management 

expertise and track record, and the types of real estate projects that the REPE funds invested 

in. 



 
 

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1.4.1 Research Questions 

1. By using Jensen’s alpha as a risk-adjusted performance measure, to what extent does 

the expertise and experience of general partners affect the performance of a REPE 

fund relative to the average market return? 

2. What category of real estate projects (such as residential, commercial, offices, mixed-

use, healthcare and student accommodation) provide the best returns for REPE 

funds? 

3. How does the actual performance of REPE funds compare to the targeted returns 

(stated in the respective funds’ prospectuses) at the time of fundraising? 

4. How do the REPE funds compare to the returns provided by IPD South African All-

Fund Index? 

1.5 Potential benefits/significance of the study 

The research would contribute to the existing literature on real estate private equity funds in 

the following ways: 

• It explores the performance of real estate private equity funds in South Africa, which is 

useful to both existing and potential investors. 

• It indicates the actual performance of private equity real estate funds relative to the 

targeted performance at the fund’s inception. 

• It informs investors of the key factors that affect performance, which can influence their 

future investment decisions.  

1.6 Limitations 

• There may be limitations regarding the amount of information available and the 

disclosure of potentially confidential information from private equity funds. 

• The focus of the study is on the South African REPE market, with less focus on the 

international market. 

• The study is limited to the latest information available/accessible regarding the South 

African market. 

1.7 Overview of data and methodology 

Data and information for the study will be from the historic performance of real estate private 

equity firms in South Africa. Information was sourced from seven REPEs through a structured 

questionnaire administered to one nominated participant from each fund. The information 

about the South African economy was sourced from the South Africa Reserve Bank. The 

method for the study is a quantitative analysis, using cross-sectional data. This method allows 



 
 

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for the analysis of several variables across different economic units at a given time. Fund 

performance in this study will be based on the overall returns that the South African real estate 

private equity funds have achieved. An absolute analysis, comparing the respective REPE 

funds' individual performance, will be done. The results will then be benchmarked against the 

IPD South African All-Fund index. The performance will be measured over the same period of 

the REPE performance data obtained.  

1.8 Outline of the study 

The report of the paper will be presented in the following order: 

i. Firstly, the report will explain what a fund is, the advantages of a fund as an investment 

asset class, an explanation of what private equity is, real estate investment as an asset 

class and the benefits of real estate as an asset class in a private equity setting. 

ii. Secondly, the literature review will summarise existing findings on the topic. This 

entails a review of publications including journals, online articles, theses and papers 

reflecting work already done on real estate private equity funds in South Africa and 

internationally. This will assist in understanding the performance of the asset class, 

and areas which need to be further researched on the topic. 

iii. Thirdly, the report will capture the research methodology used in the analysis of the 

data and information of the study. 

iv. Fourth, the report will contain the results of the study. 

v. Finally, conclusions will be drawn based on the empirical results obtained for the 

objectives of the study. 

2 LITERATURE REVIEW 

2.1 Introduction 
In this chapter, literature that relates to real estate private equity funds is discussed. The 

chapter starts by defining and discussing the concept of a fund. It also presents a discussion 

on the advantages and the disadvantages of funds as asset classes. The chapter gives a 

detailed contextual setting on real estate private equity funds within the broader investment 

world and the narrower real estate investments environment.  

2.2 What is a fund?  
An investment fund is an investment vehicle where capital that is provided by multiple 

investors is used to collectively purchase securities. In return for the supply of capital, each 

investor retains ownership and control of their shares held in the investment fund. Each 

investor has a claim to the portfolio formed by the fund in proportion to the number of shares 



 
 

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purchased. By investing in such a fund, investors benefit from a broad selection of investment 

opportunities, professional management expertise, whilst paying lower investment fees 

compared to when investing in funds on their own (Chen, 2019).  

The operation of an investment fund is managed by a professional fund manager who is 

responsible for the day-to-day management of the fund. In addition, the fund manager decides 

which securities to hold, the number of securities held and the timing of when they are bought 

or sold. Investors in the fund are thus passive investors, with no input in the investment 

strategy or management of the fund (Chen, 2019). 

Investment funds can be categorised into several categories. These include but are not limited 

to open-end funds, closed-end funds, exchange-traded funds (ETFs), hedge funds and mutual 

funds. 

Open-end funds have continuity. New shares are issued as investors increase their capital 

contributions into the fund, whilst existing shares are retired when investors redeem their 

shares in the fund. Globally, the majority of investment fund assets are held in open-end 

mutual funds. These funds are generally priced at the end of each trading day (Chen, 2019). 

However, closed-end funds issue a pre-determined number of shares that are fixed. These 

shares usually trade on an exchange at prices determined by investor supply and demand. 

Therefore, although a net asset value can be calculated, it does necessarily mean that the 

fund will trade at its par value. A closed-end fund can trade at a premium or a discount (Chen, 

2019). 

Exchange-traded funds are listed investment products that generally track a select group of 

equities, bonds or commodities. These groups or baskets are known as indices, and they can 

be traded in a similar manner as ordinary shares. The benefit of ETFs is that they allow 

investors to invest in several asset classes through one investment product (Chen, 2019). 

A hedge fund is an investment vehicle that allows private investors to pool funds together. 

They are managed by a professional fund manager who usually has a substantial portion of 

their personal wealth invested. Hedge funds usually take large risks on speculative strategies 

using a high level of leverage. These include leverage bets, program trading, swaps, arbitrage 

and the use of derivatives. The aim is to offer maximum possible returns (Kennon, 2019). 

In terms of structure, hedge funds are usually structured as private partnerships with select 

investors. These investors are typically wealthy individuals or institutional investors. They are 

considered to be experienced investors with a high-risk appetite. The investor profile for hedge 

funds allows for hedge funds to be lightly regulated. In the USA, hedge funds are not required 



 
 

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to register with the U.S. Securities and Exchange Commission (SEC) and disclose their asset 

holdings (Kennon, 2019). 

Hedge funds have special fee structures designed to motivate managers. A management fee 

is based on asset size, and an incentive fee is established separately to align the manager's 

interest with the fund's performance. The incentive fee is usually paid after a hurdle rate has 

been achieved. In addition, the majority of hedge funds also have a watermark provision, 

under which the fund manager must make up any previous losses before an incentive fee is 

paid (Kennon, 2019). 

Mutual funds pool money from individuals and organisations to invest in stocks, bonds and 

other assets in different industry sectors and regions of the world (Vyšniauskas & Rutkauskas, 

2014). 

The money collected from investors is invested by the fund manager in different types of 

securities depending on the objectives and needs of the investors. The types of security could 

range from shares and debentures to money market securities. In return for this, investors can 

receive income as dividend or interest based on the number of units owned by them 

(Vyšniauskas & Rutkauskas, 2014). 

Mutual funds are risk-averse investment vehicles. Each fund has a specific investment policy 

and only invests in assets that are clearly defined in the respective fund’s investment 

prospectus. Mutual funds are therefore classified according to their investment policy. These 

include but are not limited to money market funds, equity funds, index funds, bond funds and 

international funds (Ojah, 2019). 

A mutual fund is highly regulated. It is the most suitable investment vehicle for the common 

person as it offers an opportunity to invest in a diversified, professionally managed portfolio at 

a relatively low cost (Vyšniauskas & Rutkauskas, 2014). 

2.2.1 The advantages of a fund  
Taking the above into consideration, it is evident that investing in a real estate private equity 

fund enables an investor to build a diversified portfolio. Investors can hold fractional shares 

and obtain exposure to a number of securities across geographies and industries that would 

not be possible through direct investment by the investor (Liontrust, 2019). 

Professional management of funds reduces the likelihood and risk of uninformed investment 

decision making if the investor were to invest in assets directly. Fund managers and analysts 

can react faster to any potential investment opportunities that may arise or changes in the 

market environment. This is beneficial in volatile markets and is conducive to maximising 

potential returns (Ojah, 2019). 



 
 

12 
 

Funds can carry out block trades which reduce the average cost per transaction compared to 

direct individual investment (Ojah, 2019). 

Funds, particularly mutual funds, offer good liquidity to investors as they can be transacted at 

the end of each trading day once the net asset value has been calculated. This is subject to 

transaction fees and associated costs (Ojah, 2019). Other funds such as hedge funds do not 

offer the same liquidity benefit as they usually have lock-in periods where investors are not 

able to withdraw their investment in the fund. 

From an administrative perspective, investors benefit from good record keeping and 

administration practices by investing in funds. The reason being is that funds are required to 

issue periodic status reports, and monitor all capital gains distributions, dividends issued, 

investments made and redemptions (Ojah, 2019). 

In specific geographic locations such as the United Kingdom, there are tax benefits for 

investing in funds, as switches between shares within funds are free of capital gains tax for 

the saver. This would not be possible if the investor directly managed a portfolio of securities 

unless they were held in ‘tax-efficient wrappers’ such as tax-free savings accounts (Liontrust, 

2019). 

2.2.2 Defining private equity 
Private equity funds can be defined as collective investment schemes that obtain debt and 

capital in the financial system to acquire stakes in companies and other business 

ventures/investment opportunities to sell at a profit after a certain number of years (Ojah, 

2019). 

These funds are usually structured as limited partnerships for a finite life which can range up 

to ten years. This period may vary depending on the fund (Ojah, 2019).  

Operationally, private equity funds are actively managed by general partners who may have 

shares in the fund. However, the majority of the capital is provided by limited partners who act 

as passive investors. LPs can be institutional investors and individual investors (Ojah, 2019).  

General partners are responsible for identifying potential investment opportunities that are 

presented to the limited partners. GPs call for funds or commitments from LPs, commonly 

known as “drawdowns” or “takedowns”. GPs are incentivised for their efforts in the form of a 

management fee and a performance fee which is often equal to an agreed percentage of the 

fund’s profits (Ojah, 2019). 

Private equity can be broadly defined to include the following four forms of investment: 

leveraged buyout, growth capital, mezzanine capital and venture capital. Although private 



 
 

13 
 

equity can be defined to include all four forms of investment, leveraged buyout activities can 

be considered to be the primary descriptor for private equity. Large private equity funds 

generally participate in all four investment strategies (Stowell, 2013). 

Real estate private equity funds derive their roots from the private equity leveraged buyout 

funds which gained prominence in the USA between 1970 and 1980. Investor awareness grew 

as a result and general partners of funds responded by looking for a wider range of 

investments that included real estate. Soon thereafter, private equity funds focussing solely 

on real estate began to emerge (Wylie and Marrs, 2018). 

In general, private equity funds seek to acquire equity stakes in target companies or other 

investment opportunities, which are to be held and developed over a multi-year period and 

sold at a higher valuation thereafter. These positions can be sold in several ways which include 

selling to other firms and through a stock market listing. The holding period prior to disposal 

usually ranges between three to seven years, after which realised profits or losses are 

distributed to the GPs and LPs in proportion to their commitments to the fund (Ojah, 2019). 

2.2.3 Defining real estate investment as an asset class 
This section is drawn largely from Mercer LLC (2019). 

Real estate can be defined as tangible property consisting of land, buildings and other 

improvements.  

Real estate assets are predominantly used for residential and commercial purposes, of which 

both segments of the market offer various investment opportunities across geographies and 

risk spectrums. 

Globally, users of real estate (commercial or residential) often rent a property as a tenant 

instead of owning a particular property. The rationale behind this decision often includes cost 

and capital requirements, property maintenance, flexibility and time. This provides an 

investment opportunity for the owners of real estate as tenants to compensate owners in the 

form of rent according to a lease agreement. Lease agreements vary in terms of their validity 

periods, based on the type of property in question. For example, in the case of a hotel, it can 

be a daily agreement, whereas office properties are often leased for a number of years. 

In addition to real estate owners benefiting from rental cashflows, they could potentially 

generate returns through capital appreciation in property values. These returns can be realised 

when the asset is sold in the future. 

Investments in the real estate asset class can either be made through debt or equity positions, 

held in private or public markets. Debt investments refer to a loan on a property, whilst equity 



 
 

14 
 

investments refer to an ownership stake in a property. Investing in either option can be done 

through several investment vehicles that can be privately or publicly traded on an exchange. 

Real estate as an asset class can be separated into four quadrants, being private equity, public 

equity, private debt and public debt. 

Private equity real estate refers to an investor acquiring an equity stake in a property or a 

portfolio of properties. Institutional investors and wealthy individuals often use private equity 

vehicles such as commingled funds to invest in this asset class. In doing so, a pool of funds 

is committed, which is to be managed by an investment management firm known as the 

general partner. As previously discussed in this paper, the general partner is responsible for 

the acquiring, management and disposal of the properties on behalf of the investors known as 

limited partners. The capital provided is invested in real estate assets, and the investors 

benefit from the performance of the underlying portfolio of real estate assets. 

Other forms of private market vehicles that are used to acquire equity interests in real estate 

assets include a separate account, joint venture and direct investment. The underlying motive 

of all of these vehicles is to provide investors, using private capital, an equity interest in the 

asset class. 

Public equity real estate is similar to private equity, as it allows investors to acquire an interest 

in real estate assets. However, the differentiating factor is that the acquisition of the real estate 

assets is financed through publicly traded markets. An example of this is a real estate 

investment trust (REIT) that trades publicly on a stock exchange. Investors become 

shareholders in the REIT, and due to the legislation governing REITs, they are required to 

distribute a percentage of their taxable income to investors in the form of dividends. A benefit 

of public equity real estate such as a REIT is that it provides an investor with a liquidity benefit 

as shares are continuously traded on a stock exchange. This is not possible in private equity 

real estate. 

Private real estate debt, like private equity, also uses a commingled fund structure. However, 

investments are made in various debt instruments used to fund real estate properties. These 

investment vehicles extend debt financing in the form of a loan to finance the acquisition or 

improvement of real estate properties. The debt instruments can include senior debt, 

mezzanine debt or preferred equity. 

In terms of the income and returns generated by private debt, it differs to private equity in that 

income is not linked to the performance of the underlying real estate assets. Instead, the debt 

instruments operate like a bond where they receive a combination of interest payments and 



 
 

15 
 

fees, with the principal debt amount being repaid at the maturity date. This investment 

category is not publicly traded and does not offer high liquidity for potential investors. 

Public real estate debt is similar to private debt. However, the vehicle in which investors pool 

their funds together is traded on a public exchange. This is usually in the form of a commercial 

mortgage-backed security structure (CMBS). A CMBS structure is usually divided into various 

tranches which allow investors to invest their funds at various levels of risk. These tranches 

represent how the capital structure is divided and the priority it has in terms of payment, which 

affects the level of risk. For example, senior tranches are low risk as they receive both principal 

and interest payments from the underlying mortgages before any other tranches. Naturally, as 

investors move down the CMBS tranche structure, investors are exposed to higher potential 

risk. However, investors are compensated with higher returns compared to senior tranches. 

Residential mortgage-backed securities (RMBS) function in the same way that CMBS do. 

However, the underlying mortgages are primarily focused on single-family residential 

properties. Other types of real estate debt investment vehicles include mortgage REITs. These 

mortgage REITs operate in a similar manner to a property REIT in that they are publicly traded 

and distribute a certain portion of their taxable income to investors as dividends. The rationale 

behind mortgage REITs is to originate or purchase loans on their balance sheet with the 

intention of either holding the debt or selling it to a CMBS pool. 

2.3 Special features of real estate as an asset class in a private equity setting 
This section is drawn largely Wylie and Marrs (2018). 

Based on the research conducted, there are several unique features of real estate as an asset 

class in a private equity setting. However, to get a clear understanding of these features, they 

will be categorised according to the REPE fund's goals, fund structure, legal requirements and 

fund economics. 

2.3.1 REPE fund type and goals 
As previously discussed in section 1.2.3 Types of Real Estate Private Equity Funds, proposal 

REPE funds are classified according to their risk/return profile as either core, core plus, value 

add or opportunistic funds. These are categorised in ascending order of their risk/return profile 

and are therefore targeted at different investment goals. 

Furthermore, REPE funds are also product and geographically specific.  

Regarding product types, these include property types such as industrial, retail, multifamily or 

high-rise residential, offices, healthcare, hotel and leisure, and mixed-use developments 

(Mercer LLC, 2019). 



 
 

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The above can be further categorised according to specific geographic locations where 

investments are made. Geographies are divided by metropolitan statistical areas (MSA) within 

a country into primary, secondary and tertiary categories.  

Primary markets refer to areas with a high population density, diversified local economies, with 

high disposable income and the largest and liquid real estate market. These markets offer the 

lowest risk to investors. 

Secondary markets lag slightly behind primary markets in the abovementioned categories and 

offer a higher risk/return profile. Lastly, tertiary markets lag on secondary markets in the same 

categories and offer the highest risk/return profile. Geographic diversification by a fund helps 

eliminate the risk exposure to a particular market or region, whilst product/property type 

diversification reduces GDP linked risk factors (Mercer LLC, 2019). 

In addition to the above categories of REPE funds, they can be divided according to the 

general partner’s strategy to include allocator funds and operator funds.  

Allocator funds invest in real estate assets alongside local joint venture partners. The local 

partners act as the operators of the property, usually in a development manager capacity, 

thereby providing operating services to the properties invested in.  

As compensation for their efforts, allocator funds are generally required to pay the local JV 

partner a profit element in addition to other fees incurred. This is known as a carried interest 

or a promoter fee. 

Operator funds invest in real estate assets and provide the operating services to the respective 

properties directly. These funds aim to add value to the assets invested in on a local basis 

compared to allocator funds, and are therefore smaller in terms of the fund size. In practice, it 

can be challenging to distinguish between the two types as some larger REPE funds may be 

involved in both allocator and operator activities depending on the assets invested in and the 

respective investment strategies for those particular assets. 

2.3.2 REPE fund structure 
The primary vehicle for REPE funds is generally a limited partnership. The broader fund 

structure can comprise a number of other fund vehicles such as feeder and parallel funds, 

which in turn can include corporations and private REITs. This tends to occur in the USA for 

tax purposes. Certain REPE funds wish to limit unrelated taxable income for US tax-exempt 

investors and the tax that is payable for non-US investors. 

The key features of a limited partnership REPE fund structure include: 



 
 

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• The general partner has management control over the limited partnership and 

unlimited liability to third parties for the debts and obligations related to the limited 

partnership. 

• Limited partners are passive investors with no active management control. Their 

exposure to creditors and other third parties is limited to the amount of capital 

contributed to the limited partnership. 

• The form of ownership is taxed in a similar manner to a partnership, which implies that 

the partners are taxed individually, with no (or limited tax) at a company level. 

There is no single unique fund type structure that is applied globally. Instead, if a REPE fund 

aims to attract investment internationally from multiple jurisdictions, the fund can use several 

fund vehicles specific to each foreign country that act as feeder or parallel funds to the local 

REPE fund. 

In the USA, the most common company form used for REPE funds is a limited partnership 

established under the state laws of Delaware, USA. Whereas in Europe, similar limited 

partnership forms are used which are registered in jurisdictions such as the Cayman Islands, 

Guernsey and Jersey. The main reason behind such fund vehicles and structures relates to 

the tax benefits and the limited disclosure of information required by governments and tax 

authorities in these jurisdictions. 

2.3.3 Personnel 
Most REPE funds have an advisory committee/board that is responsible for consulting and 

advising the general partner on issues relating to conflicts of interest and valuations of assets. 

They are appointed by the general partner but have no active management role in the fund. 

In addition to the advisory committee, a REPE fund may establish an investment committee 

comprising of representatives from both the general partner and limited partners. The 

representatives in the investment committee are not investors in the fund but provide expertise 

in terms of the investment decisions for the REPE fund. 

2.3.4 REPE fund economics 
Special features regarding the economic aspects of REPE funds relate to capital contributions, 

distribution provisions and management fees. 

In terms of capital contributions, the limited partners are responsible for providing the bulk of 

the funds required. The amount committed by the limited partners is used to fund investments 

identified by the general partners and pays for the general expenses of running the fund. 

Generally, the limited partners do not provide the entire capital contribution at the inception of 

the fund but will provide the capital on an “as needed” basis when draw-downs are called for 



 
 

18 
 

by the general partners. These drawdowns are usually made on a ten-day notice period to 

limited partners.  

Once the capital has been contributed, limited partners are subjected to a lock-in period where 

they cannot withdraw their funds or transfer any ownership interest. This period is agreed upon 

in the limited partnership agreement. 

Limited partners will, in most cases, require that the general partners invest a certain amount 

of their own capital into the fund. This ensures that their interests are aligned. 

With regards to distributions made by a REPE fund, the provisions are contained in the limited 

partnership agreement. They include information about the timing and manner in which 

distributions are made. In certain cases, the general partner may have the discretion regarding 

the timing of distributions made. The provisions are commonly termed as the “waterfall”. Profits 

are shared between the limited partners and the management team. The management team 

usually receives a profit that is disproportionate to their capital contribution, known as “carried 

interest”. The intention behind this distribution structure is to incentivise the management team 

to ensure the fund’s success. 

The manner in which the waterfall functions is as follows: 

• The fund will first pay back the original capital contributions to the limited partners, and 

the minimum agreed hurdle rate relating to their commitments. 

• In most limited partnership agreements, there is often a “catch up provision” for the 

general partners. The provision entitles them to receive approximately 20% of the 

hurdle rate profits received by the limited partners. 

• The remaining profits are then split between the limited partners and the general 

partner. This is, in most cases, an 80:20 split (LP:GP). 

Additionally, distributions can be made on a deal by deal basis. 

Management fees are paid quarterly in arrears, and they range from 1% to 2.5% of the total 

capital committed. 

2.4 The benefits of real estate as an asset class in a private equity setting 
To fully understand the benefits of real estate as an asset class in a private equity setting, it is 

important to understand the benefits of each component individually, i.e. real estate as an 

asset class, and private equity as these individual benefits combine in the form of a REPE 

fund. 



 
 

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Real estate as an asset class provides investors with benefits that include, but are not limited 

to, providing high stable cash flow returns, portfolio diversification and a hedge against 

inflation. 

Real estate provides stable and significant total returns over a long-term period. In the USA, 

over a thirty-year period between 1977 and 2008, approximately eighty percent of real estate 

returns were generated from rentals. This reduces the volatility in expected returns for 

investors (Palmer, 2019).  

Real estate provides the benefit of portfolio diversification when combined in a portfolio of 

other assets. The reason for this is that real estate has a low correlation to other major asset 

classes, thus reducing the volatility of a portfolio to provide a higher return per unit of risk taken 

(Palmer, 2019). 

In addition to this, a real estate portfolio can be diversified even further by investing in specific 

types of real estate assets and in different geographic locations. 

The benefit of the asset class providing a hedge against inflation originates from the linear 

relationship between the demand for real estate and the GDP growth rate of a country. As 

economies perform and GDP growth rates increase, the demand for real estate increases. 

This results in rentals and property values appreciating. Thus, the asset class maintains its 

purchasing power of capital as a portion of the inflationary pressure is passed on to tenants, 

whilst a portion is absorbed in terms of capital appreciation (Palmer, 2019). 

The benefits of private equity as an investment vehicle include large financial resources as a 

result of pooled capital contributions. The capital leverages off a strong network of skilled 

professional expertise, a healthy deal flow of potential investment opportunities, management 

incentives that are aligned with funding performance and a proven record (Bushkie, 2018). 

The abovementioned benefits of the asset class and the investment vehicle serve as a basis 

for understanding the benefits of investing in real estate, using private equity as the investment 

vehicle holistically. 

In addition to this, specific benefits of investing in the real estate asset class through REPE 

funds compared to other investment vehicles such as REITs include: 

• REPE funds are not affected by stock market fluctuations that publicly-traded REITs 

are exposed to. The market value of REITs is directly affected by macroeconomic 

events or conditions. Such events may not necessarily have any relationship to real 

estate fundamentals (Episcope, 2019). 



 
 

20 
 

• Publicly traded REITs are a more volatile investment vehicle compared to REPE funds. 

In the USA, publicly-traded REITs are the second most volatile asset class, of which 

first place has been held by emerging market stocks, since the year 2000 (Episcope, 

2019). 

• REPE funds have different investment goals compared to publicly-traded REITs, which 

in theory, offer investors greater returns. This can be explained by understanding the 

alpha and beta values which are considered when evaluating an investment decision. 

The beta value measures a fund's volatility relative to a market index, which publicly-

traded REITs place a significant amount of emphasis on. However, the alpha value 

refers to the difference between a fund’s expected return (which is based on its beta 

value) and the actual return achieved. The difference between the alpha and beta 

values is often interpreted as the added value achieved through the skill of a portfolio 

manager or general partner. REPE funds place a significant amount of emphasis on 

the alpha value as they often intend to outperform the market on a risk-adjusted basis 

and achieve returns above the index (Episcope, 2019). 

• REPE funds provide a more sustainable fee structure compared to private REITs 

through direct investment in properties on behalf of investors and thereafter, acting as 

the operator. This serves investors' interests more and eliminates any costs associated 

with intermediaries. This fee benefit has been more apparent in the USA as private 

REITs have declined due to the high upfront fee structure which could amount to 15% 

of the offering price. This results in less of the funds being invested in the actual assets 

for the investor. In addition, private REITs also charge high transaction costs and asset 

management fees. Therefore, the American Financial Industry Regulatory Authority 

(FINRA), set requirements to increase transparency and protect investors. The 

requirements require private REITs to issue financial statements to investors. This led 

to private REITs attracting one-fifth of the investment in the year 2016 compared to 

what was raised in 2013. This statistic has held in the years thereafter (Episcope, 

2017). 

• The investment process in REPE funds is in theory less risky and offers potentially 

greater returns compared to private REITS. The reason for this is that private REITs 

require cash upfront from any potential investor before the REIT actually acquires any 

properties. The intention of a REIT is for investors to acquire a stake in a diversified 

pool of real estate assets. However, this pool of assets may not exist at the inception 

of the REIT. Furthermore, REITs are required to pay dividends to investors quickly, 

which places asset managers under time pressure to acquire properties to generate 

returns. This time-pressure factor can result in fund managers not investing in the 



 
 

21 
 

assets which offer the best future returns potential, the most competitive current asking 

price or even the assembling of the most diversified portfolio. However, REPE funds 

operate on a capital call system where investors are only required to commit funds if 

the fund's investment criteria and overall investment goals are suitable, which is 

identified following a due diligence process for properties (Episcope, 2017). 

• In addition to the above point, private REITs have a commitment to pay dividends to 

investors which puts them under cashflow pressure and increased risk compared to 

REPE funds which pay dividends to investors at the discretion of the general partner. 

This can lead to private REITS having to borrow money or raise more equity to pay its 

investors rather than focussing efforts on deriving higher cashflows from its properties 

(Episcope, 2017). 

• Private REITs pose potential conflicts of interests to their investors compared to REPE 

funds. The reason for this is because private REITs are often externally managed, 

compared to REPE funds where the general partners often have a vested interest in 

terms of equity in the fund. These external managers are compensated in terms of 

transaction fees and assets under management, whereas REPE fund general partners 

are compensated based on fund performance. Hence, the interest of the REIT 

management team’s compensation may not align with shareholder interest and in the 

case of REPE funds. Furthermore, the external managers may have affiliations to other 

companies that could be competing with the REIT in question (Episcope, 2017). 

3 CHAPTER 3: METHODOLOGY 

3.1 Introduction  

This chapter identifies and explains the philosophies, methods and processes that guided the 

collection, analysis and presentation of the data in this study. It starts with a brief discussion 

on the philosophical views surrounding modern-day business research before discussing the 

research design that was inspired by these philosophies. In the chapter, the study sample and 

the data analysis methods applied to collect the data are also discussed. The chapter closes 

with an outline of the research ethics that were adhered to in the study. 

3.2 Research paradigm 
A paradigm is a world view that society applies in an attempt to understand phenomena 

around it (Saunders, Lewis, & Thornhill, 2015). In research, there are three broad world or 

philosophical views, these being the interpretivist view, the positivist view and the pragmatic 

view (Kumar, 2014). Interpretivism is the philosophical view that supports the notion that social 

research best answers research questions if it accommodates subjectivity. This is because 



 
 

22 
 

subjects or candidates of research hold different perspectives about the same phenomena, 

these perspectives being a result of various experiences, environments and internal mental 

and behavioural facets (Cohen, Manion, & Morrison, 2011). Hence different persons can hold 

different views about the same phenomena without any among them being rendered wrong. 

Interpretivism supports research designs that take cognisance of human dynamism, such 

designs being flexible enough to accommodate diversities (Blaikie & Priest, 2017).  

Positivism, on the contrary, is a philosophical view premised on the belief that research is 

meaningful if it produces scientifically-testable and objective results (Creswell, 2014). 

Positivists believe that there is objective common truth in every phenomenon under study 

(Bryman & Bell, 2014). A good research design can display this objectivity, resulting in reliable 

research conclusions. Positivism is argued to have been born in the natural sciences where 

the need for rigorous, structured tests that bring out reliable results is high. In the economic, 

financial and business fields, the application of positivist, scientific methodologies to study 

phenomena increased due to the need for reliable results (Blaikie & Priest, 2017). Positivists 

believe in using quantitative research designs that consist of large structure samples and the 

use of standardised data analysis tests to extract objective truths (Cohen, Manion, & Morrison, 

2011). However, Kumar (2014) argues that positivism as a paradigm can also guide qualitative 

studies. 

Pragmatism, according to Kumar (2014), is a philosophical view that asserts that the best 

research design is guided by research questions that need to be answered. Kumar states that 

under pragmatism, both interpretivist views and positivist views are often combined to get the 

best of the two. Pragmatism is associated with mixed-method studies that combine aspects of 

both qualitative and quantitative research designs (Kumar, 2014). 

A positivist world view guided this study. The phenomena under study were mostly of an 

objective and structured nature. Therefore, the variables were required to be tested under the 

guidance of a philosophy that supports this aspect. The study assessed rates of returns, risk 

profiles and fund performances, all being phenomena that required objective scores. 

3.3 Research design 
Research designs, as argued by Creswell (2014:12) “are types of inquiry within qualitative, 

quantitative and mixed-methods that provide specific directions for procedures in a research”. 

Kumar (2014) defines them as blueprints that guide how a study will be conducted so that it 

can effectively answer posed research questions.  Creswell (2014) believes there is no 

universal definition of a research strategy; some scholars classify research designs as 

research methods and research strategies. However, Saunders et al. (2014) call what Kumar 

(2014) notes to be research designs as strategies. Kumar (2014) lists experimental, 



 
 

23 
 

descriptive surveys, explanatory designs and exploratory designs as the core research 

designs. 

A descriptive survey is the strategy of choice for this study (Kumar, 2014). The survey involves 

selecting part of a population that provides data through answering standardised, descriptive, 

guided questions, often of a structured or semi-structured nature (Bryman & Bell, 2014; Gray, 

2017). A descriptive survey was selected because the research questions were best 

answerable through standardised or structured data collected from a knowledgeable and 

involved sample, specifically the fund managers of real estate private equity (REPE).  

Other research designs discussed by Kumar (2014) include explanatory designs, where the 

goal is to explain causality relationships; and exploratory studies, that aim to extract new truths 

from new or poorly understood phenomena and experiments. These were not suitable for this 

study’s research questions, which required a description of known phenomena within a REPE 

setting. 

3.4 Research methods 
Research methods are the procedural manner in which a study is carried out (Creswell, 2014). 

Creswell (2014) also puts research designs as occurring within broader methods, these being 

qualitative, quantitative and mixed methods. Saunders et al. (2015) classify methods as 

research choices. These methods can be used singly (mono-methods) or jointly (multi-

methods). Regardless of extensive debate relating to what is a research method and what is 

a research design, research scholars agree on the following differences between qualitative 

and quantitative methods/designs: 

Table 3.1: Differences between qualitative and quantitative methods 

Quantitative Methods Qualitative Methods 

Relies on data that is or can be reduced to 

numerical form. 

Data analysed can take many forms, 

including textual and pictorial forms. 

Relatively large samples are required for 

testing hypotheses and making descriptions. 

They make use of small samples. 

Are generally deductive. Are mostly inductive. 

Detailed, concise and standardised data is 

preferred.  

Subjective data that can be both 

standardised and unstandardised.  

Concerned with the generalisation of sample 

findings to a wider population. 

Results are not generalisable to a wider 

population. 



 
 

24 
 

Argued to produce highly reliable results. Results reliability is argued to be low.  

The researcher plays a neutral role in data 

generation. 

The researcher is involved in or is a 

participant in data generation. 

Source: (Cohen et al., 2011; Creswell, 2014; Saunders et al., 2015; Gray, 2017) 

The study used quantitative methods to ensure greater reliability of results given that data to 

be collected and analysed was mainly numerical and required objectivity. 

3.5 Research horizons 
There are two common types of research horizons. These are cross-sectional and longitudinal. 

With cross-sectional research, data is collected at one period in time (Kumar, 2014). 

Longitudinal studies are carried out over a considerably longer period and are concerned with 

assessing changes in the phenomena of study over time (Bryman & Bell, 2014). This study 

applied a cross-sectional research horizon. This type of research is appropriate when the 

research questions require one to conclude on the phenomena under interest at one point in 

time. This study was conducted as a cross-sectional study because the primary objective was 

to assess the performance of REPEs at one point in time. Saunders et al. (2015) justify cross-

sectional studies in academic research by stating that, more often than not, academic 

researchers do not have adequate time and resources to conduct studies that span over 

various periods. 

3.6 Population and sampling  

A population is a universal set of all the subjects that meet the criteria to participate in research 

(Hakim, 2012; Parahoo, 2014). Depending on its nature, a population can be specific or 

determinable (Bryman & Bell, 2014). If a population is specific, then its units and their volumes 

will be known. In this study, the population was known as all real estate private equity funds 

were registered and operating in South Africa as at the time of the study. The population 

consisted of REPE, who are members of the Southern African Venture Capital and Private 

Equity Association (SAVCA). A list of 18 funds was identified. The sample was not specifically 

known but was determined as REPE funds. 

3.6.1 Unit of analysis  

Babbie (2016) defines units of analysis as the who and what aspects of a study. It identifies 

the participants/entities under study and the components of study within them. In this study, 

the unit of analysis was the seven REPE funds that were sampled.  The data for the analysis 

was collected through a structured questionnaire. The units of observation in the study were 

the funds’ performances and perceptions relating to performance and risk. 



 
 

25 
 

3.6.2 Sampling methods 

Sampling is the process of selecting part of the population to participate in a study (Gray, 

2017). There are two types of sampling, probability sampling and non-probability sampling. 

With probability sampling, every element in the population has got an equal or determinable 

chance of being part of a sample (Creswell, 2014). Therefore, probability sampling is preferred 

because it reduces bias risks and enhances the representativeness of a sample (Blaikie & 

Priest, 2017). However, researchers may have to resort to non-probability sampling. Firstly, 

the whole population may not be accessible to the researcher, and some population elements 

may not be willing to participate in the study (Bryman & Bell, 2014). Secondly, identifying and 

quantifying a whole population may not be possible. Under such situations, non-probability 

sampling becomes the only sampling option available (Saunders, Lewis, & Thornhill, 2015). 

This study resorted to non-probability sampling due to the inability to access the whole 

population, from which a random sample could be drawn.  

3.6.3 Sampling procedure 

Convenience sampling is a type of non-probability sampling that involves the use of a specific 

convenience factor to select sample units (Gray, 2017). In this study, the convenience factors 

that were applied in selecting participating firms were the willingness to participate. This was 

in addition to the basic requirement of being a registered REPE, operating in South Africa, and 

a member of SAVCA. 

The first sampling stage involved identifying REPEs registered under SAVCA. The second 

stage involved requesting the participation of the identified REPEs. REPEs that were willing 

to participate, each had to provide one respondent who would answer the questionnaire.  

3.6.4 Sample size 

A sample size of 7 firms in a population of 18 firms was noted as adequate. This sample size 

was guided by Singh and Masuku (2014) who assert that for samples below 500 units, a ratio 

222/500 can be used to attain a margin of error below 10% at a significance level of 0.05 and 

a 0.95 level of confidence. Therefore, this sample was noted as being of an adequate size to 

represent the REPE sub-sector in South Africa. 

3.7 Data collection 

Two types of data were collected for the study. Primary data is data that is considered new 

and unique, while secondary data is data that is already in existence and can be extracted for 

research purposes (Babbie, 2016). 



 
 

26 
 

3.7.1 Primary data collection 

Primary data was collected using a structured questionnaire that asked the same questions to 

all the respondents. Questionnaires were administered to nominated respondents who then 

filled them in and sent them back. The data collection tool used in the study had two main 

types of questions. General multiple-choice questions that requested respondents to select 

either one or more responses from a given list dominated the instrument. It also included Likert 

scale type questions where respondents were required to select a response that best reflected 

their perceptions on a phenomenon. Please refer to Appendix B for the questionnaire. 

3.7.2 Secondary data 

Secondary data was publicly acquired online. This was in the form of a report by MSCI entitled, 

MSCI Online Benchmark Report June 2019. This report was used to provide data that was 

compared to the performances of the sample. Secondary data used in the data analysis also 

includes the risk-free rate of return extracted from the South African Reserve Bank’s (SARB) 

website and the beta coefficient extracted from the Johannesburg Stock Exchange (JSE) 

website. These were used in the calculation of Jensen’s alpha discussed later in the chapter. 

3.8 Data analysis 

Data analysis is the process of making meaning out of collected data as a way of attaining 

research conclusions (Kumar, 2014). The study applied two main types of data analysis, these 

being descriptive tests and inferential tests.  

3.8.1 Descriptive tests 

Descriptive tests that were done were frequency analysis and comparison of means. Data was 

presented in tabular and graphical formats before being interpreted. In all the tests, results 

from across the seven funds were compared and contrasted. Details, particularly returns, from 

the seven funds were also compared with benchmarked returns from secondary data. 

3.8.2 Pearson correlations 

Pearson correlations are used to test if statistical relationships exist between two numerical 

and continuous variables. The other assumptions of the tests are that the data should be 

normally distributed and should suggest a linear relationship (Walker, 2010). Data in the study 

met the assumption of a normal distribution that was assessed using kurtosis and skewness 

tests. 

A skewness, kurtosis and standard deviation between -3 and +3 were used as a cut-off for 

normality as discussed by Lussier (2011) and Warner (2013), noting that the further away 

these indicators are from 0, the more likely that data was not normally distributed. A 5% level 



 
 

27 
 

of significance (p<0.05) was used to denote statistically significant Pearson correlations. The 

use of a 5% level of significance as a benchmark in hypothesis testing is an expected norm 

for business research (Walker, 2010; Lussier, 2011; Sabo & Boone, 2016). 

3.8.3 The Jensen’s alpha test 

The Jensen’s alpha test is used in finance and econometrics to assess whether returns from 

a portfolio under review had outperformed the market (Francis & Kim, 2013). It is calculated 

using the following formula: 

Jensen’s Alpha = R(i) - (R(f) + B * (R(m) - R(f)) 

Where: 

R(i):  The realised return of the portfolio or investment. 

R(m): The realised return of the appropriate market index. 

R(f):  The risk-free rate of return for the time period. 

B:  The beta of the portfolio of investment regarding the chosen market index. 

 

In this study, an alpha was calculated for each of the seven funds to assess if it had 

outperformed the market or not. 

The realised return of the portfolio or investment (Ri) was obtained from the questionnaire as 

per the response of the nominated respondent for each of the seven funds. The benchmark 

return from the MSCI Online Benchmark Report June 2019 was used as the realised return of 

the appropriate market index (Rm). The one-year Treasury Bill rate of return for June 2019 

was used as the risk-free rate of return (Rf). 

3.9 Reliability and validity 
In research, reliability refers to a study’s ability to produce consistent results and conclusions 

if repeated within the same context (Creswell, 2014; Babbie, 2016). Saunders et al. (2015) 

assert that reliable data collection, analysis and interpretation processes will produce the 

same, consistent results. However, Saunders et al. (2015) mostly associate reliability with the 

data collection tool and note that consistency is controlled at the data collection tool level.  

Theoretically, if a study is reliable, any part of the population will come up with similar views 

on the study phenomena. Therefore, reliability is important in quantitative studies that aim to 

generalise findings to a broader population. In this study, the steps that were taken to ensure 

consistency in data collection and measurement included a pilot test of the study. 



 
 

28 
 

3.9.1 Pilot testing the data collection tool 
A pilot test is a smaller version of a proposed test that is done to prepare for the final study 

(Cohen et al., 2011). A pilot test gives a researcher the opportunity to correct the data 

collection procedures and the data collection tool (Bryman & Bell, 2014). Four professionals 

from the REPE sector were approached with a questionnaire for testing purposes. The pilot 

test assessed whether the respondents understand the questions consistently. Consistency 

of responses can get lost through respondents failing to understand research questions 

(Babbie, 2016). 

 

A few adjustments were made to the data collection tool using output from the pilot test. These 

included the use of standard terms to describe returns from investments, using simpler words 

and reducing the length of the questionnaire. 

3.9.2 Validity 
The validity of a study refers to whether it measured what it intended to measure. The concept 

of validity in research is considered important, given that reliability does not guarantee 

accurate results (Bryman & Bell, 2014).  The validity, on the contrary, seeks to establish if the 

intended effect was measured in the correct way and therefore, can be analysed and 

concluded upon (Creswell, 2014; Parahoo, 2014). The pilot test was also important in 

enhancing the validity of the research. With the data obtained from this test, it was possible to 

assess if the responses from the sample represented what the research questions intended. 

3.10 Ethical consideration  

Research ethics refers to a set of moral guidelines that researchers must abide by as they 

conduct their studies (Wiles, 2012). Saunders et al. (2015) define them as the obligations that 

a researcher has towards the preservation of the right of his/her subjects. According to Kumar 

(2014), all the stages of research should be guided by ethics. In this study, confidentiality and 

anonymity, the right to informed consent and voluntary participation and protection from harm 

were observed. 

3.10.1 The right to anonymity and confidentiality 

Researchers are obliged not to disclose information that identifies or can lead to the 

identification of research participants who would have indicated a preference to stay 

anonymous (Wiles, 2014; Scheurich, 2014). Seven funds were sampled; one participant from 

each fund was selected to respond to the questionnaire used to collect data. Neither the fund 

nor its respondent’s identity was disclosed in the study. Therefore, the funds and the 

participants remain confidential and anonymous.  



 
 

29 
 

3.10.2 The right to informed consent and voluntary participants 

Participants must consent to partake in a study (Creswell, 2014). Under informed consent, 

participants should have the details pertaining to the nature of the study, the purpose of the 

study and how their data will be used (Wiles, 2012; Babbie, Bryman & Bell, 2014; Babbie 

2016). According to Kumar (2014), participants can only participate voluntarily once they have 

been informed of all the pertinent matters of a study and agree to partake. In the study, both 

informed consent and voluntary participation were observed as participants were informed 

about the name of the research, its purpose, the researcher and the researcher's institution. 

The participants were also informed that the research document may be published in future. 

3.10.3 Protection from harm 

The researcher must ensure that participants to the study are not physically or mentally 

harmed (Cohen, Manion, & Morrison, 2011). Protection from harm, as an ethical consideration, 

also includes the possibilities of participants being penalised from participating in a study 

(Wiles, 2012). In this study, the researcher advised the participants that no known physical or 

mental harm would befall them for taking part in the study. At the same time, the researcher 

advised participants to respond only if they are authorised to do so by their organisations. 

3.11 Conclusion 

To conclude, this study used a descriptive survey research design as part of an overall 

quantitative research method. A quantitative approach to the study was motivated by the 

research questions. Convenience sampling was used to select seven REPE firms as 

participants out of an estimated population of 18. Data was analysed quantitatively using 

descriptive statistics, Pearson correlations and Jensen’s alpha. The study was conducted 

under strict ethical guidelines that involved respecting the sample’s confidentiality and 

anonymity, its right to informed consent and voluntary participation and the protection from 

known harm. The next chapter presents that data analysis results obtained using the methods 

discussed in this chapter. 

 

  



 
 

30 
 

4 CHAPTER 4: DATA ANALYSIS AND INTERPRETATION 

4.1 Introduction 

In this chapter, data collected from seven fund managers from REPE investments sector is 

presented. Data was analysed using SPSS version 17 and Microsoft Excel.  The analysis was 

guided with the need to answer the following research questions: 

• By using Jensen’s alpha as a risk-adjusted performance measure, to what extent does 

the expertise and experience of general partners affect the performance of a REPE 

fund relative to the average market return? 

• What category of real estate projects (such as residential, commercial, offices, mixed-

use, healthcare and student accommodation) provide the best returns for REPE 

funds? 

• How does the actual performance of REPE funds compare to the targeted returns 

(stated in the respective funds’ prospectus) at the time of fundraising? 

• How do the REPE funds compare to the returns provided by the IPD South African All-

Fund Index? 

The results start with the descriptive statistics on the seven funds covering all the questions 

on the questionnaire used to collect the data. 

4.2 Description of the funds  

The sample comprised of seven REPE funds. The funds were labelled from Fund A to Fund 

G. Table 4.1 below comparatively summarises the characteristics of theses seven funds. 

  



 
 

31 
 

Table 4.1: Description of the funds 

Fund Fund A Fund B Fund C Fund D Fund E Fund F Fund G 

What is the 

type/classification 

of real estate 

private equity fund 

that you are 

involved in? 

Value-

add Fund 

Value-

add Fund 

Value-

add 

Fund 

Value-

add 

Fund 

Opportunity 

Fund 

Opportunity 

Fund 

Opportunity 

Fund 

What is the risk 

appetite of the 

fund? 

Moderate moderate low low moderate moderate moderate 

What is the 

average time 

horizon of the 

REPE fund? 

5-10 

years 

5-10 

years 

5-10 

years 

5-10 

years 
5-10 years 5-10 years 5-10 years 

What is the lock-in 

period, in years, for 

limited partners 

before they can 

access their funds 

invested? 

5 years 5 years 5 years 6 years 6 years 7 years 7 years 

 

Funds A, B, C and D were classified as value-added funds while Funds E, F and G were 

classified as opportunity funds. There were no core funds or core-plus funds in the sample. 

Two funds, Fund C and Fund D, were classified as low-risk funds. Funds A, B, E, F and G 

were classified as moderate risk funds. Therefore, moderate risk funds dominated the sample. 

The average time horizon for all the seven funds was between six to ten years. The lock-in 

period for Funds A, B and C was five years. The lock-in period for Funds C and D was six 

years, and the lock-in period for Funds F and G was seven years. 

4.2.1 Firms fund sizes 
Figure 4.1 below shows the sample response on the size of the real estate funds managed by 

their firms. Three multiple choice responses were provided, being R50-100 million, R100-200 

million, R200-500 million and over R500 million. 



 
 

32 
 

 

Figure 4.1: What is the average size (in ZAR) of the real estate private equity funds 
that are formed by the firm? 

Three funds were from firms with an average between R200-500 million, these being Fund B, 

D and G. Another three funds, Funds C, E and F were from firms with average real estate 

equity funds over R500 million. Fund A was the only one from a firm with an average 

investment below R200m.  

4.2.2 Real estate categories  
Table 4.2 below shows the different categories of real estate that the seven funds invested in. 

The sample was provided with seven categories from which they had to select their areas of 

investments. These categories were Residential, Commercial, Offices, Mixed-use 

developments, Healthcare, Student accommodation and Other. 

  

Fund A

Fund B,D,G Fund C,E,F

0

0,5

1

1,5

2

2,5

3

3,5

101-200 million 201-500 million Over 500 million

N
o

 o
f 

Fu
n

d
s



 
 

33 
 

 

Table 4.2: Which categories of real estate assets does the fund invest in? 

  Fund A Fund B Fund C Fund D Fund E Fund F Fund G Total 

Residential x x x x   x X 6 

Commercial       x       1 

Offices       x       1 

Mixed-use 

developments 
              0 

Healthcare        x       1 

Student 

accommodation  
x x x       X 4 

Other         X     1 

Total 2 2 2 4 1 1 2 14 

 

Six out of seven funds invested in residential property, these being Funds A, B, C, D, F and 

G. One Fund (Fund D) invested in commercial real estate, offices real estate and one in 

healthcare real estate. Four out of seven funds invested in student accommodation, these 

being Funds A, B, C and G.  Five funds were therefore diversified investing in at least two 

types of real estate except for Funds E and F that invested in one type of real estate. 

Residential and student accommodation were also noted to be the most invested in categories 

in the sample. 

4.2.3 Investments by province 
Table 4.3 below shows the sample’s responses to the question regarding the funds' 

geographic locations. 

  



 
 

34 
 

 

Table 4.3: Which geographic locations does the fund invest in? 

Province Fund A Fund B Fund C Fund D Fund E Fund F Fund G Total 

Gauteng X x x x x x x 7 

Western Cape X     x       2 

KZN   x x     x x 4 

North West     x   x x x 4 

Limpopo         x x x 3 

Eastern Cape       x       1 

Northern Cape       x       1 

Free State X   x x x     4 

Mpumalanga               0 

Total 3 2 4 5 4 4 4 26 

 

All seven funds invested in Gauteng.  Four invested in KZN, the North West and the Free 

State provinces. Two invested in the Western Cape Province, and one invested in the Eastern 

Cape and the Northern Cape. Fund D was diversified across five provinces, while Funds C, 

E, F and G were diversified across four provinces. Fund A and Fund B were diversified across 

three and two provinces, respectively. All funds were therefore represented in Gauteng and 

none in Mpumalanga.  

4.3 Perceptions on factors affecting fund performance 

Figure 4.2 below shows the sample's responses on four statements aimed to test important 

factors affecting fund performance. Responses to the four questions were on a four-scale 

Likert with the following options: no impact, small impact, moderate impact and significant 

impact. 

  



 
 

35 
 

 

Figure 4.2: What are the key factors that affect fund performance? 
 

All the seven respondents believed that macroeconomic factors such as prevailing economic 

conditions, interest rates, geographic location of investments, demographics in the area where 

the investment are made had a significant impact on the performance of real estate funds. Six 

out of seven also believed that the sponsors/general partners track record from previous 

funds, had a significant impact on fund performance. However, one respondent believed that 

it had a moderate impact on the same. Five out of seven respondents also believed that the 

general partner's fee incentive had a moderate impact on fund performance, while the other 

two perceived this factor as having a small impact on fund performance. Lastly, five 

respondents believed that skill, expertise and experience of the general partner had a 

significant impact on fund performance while two, believed that the impact this factor had was 

moderate. Therefore, the sample was commonly positive that macroeconomic factors had a 

stronger impact on fund performance than other factors tested above. 

4.4 The impact/effect of the experience of the firm 

Table 4.4 below shows responses to questions relating to the number of years that a firm and 

its partners have in existence. 

  

2

2

5

1

5

6

7

0 1 2 3 4 5 6 7 8

Skill, expertise and experience of the general partner

Fee incentive of the general partner

The sponsor/general partners track record from previous
funds

Macroeconomic factors such as: prevailing economic
conditions, interest rates, geographic location of

investments, demographics in the area where the
investment is made

Significant impact Moderate impact Small impact No impact



 
 

36 
 

Table 4.4: The effect/impact of experience 

Question/statement Responses 

n 

(respondents) Funds 

How long has the firm been in existence in years? 

0-5 years 0   

5-10 years 2 A, D 

10-15 years 3 B,F,G 

15-20 years 2 C,E 

Over 20 years 0   

Total 7   

Does the establishment period of the managing firm 

of the REPE fund have any bearing on its fund’s 

performance?  

Yes 5 B,C,E,F,G 

No 2 A, D 

Total 7   

To what extent does the establishment period of the 

management firm have an impact on the fund’s 

performance? 

No impact 0   

Small impact 1 G 

Moderate 

impact 3 A,C,D 

Significant 

impact 3 B,E,F 

Total 7   

How many years of professional experience does the 

general partner have working in the REPE 

environment, or within the industry? 

0-5 years 0   

5-10 years 0   

10-15 years 4 A,B,D,G 

15-20 years 2 C,F 

Over 20 years 1 E 

Total 7   

 

Three funds (B, F and G) were from firms that had existed for between 10 to 15 years. Two 

funds (A and D) were from firms between 5 to 10 years old. Lastly, another two funds were 

from firms that were between 15 to 20 years old. All the funds had therefore been in existence 

for a considerable period. 

Five out of seven funds believed that the establishment period of the managing firm of the 

REPE fund has a bearing on its fund’s performance. The remaining two funds (A and D) held 

a contrasting view. 



 
 

37 
 

Out of the seven funds, three funds (A, C and D) believed that the establishment period of the 

management firm has a moderate impact on the fund’s performance. Another three funds (B, 

E and F) believed that it had a significant impact while one fund (G) believed establishment 

period had no impact. 

4.5 External risk perceptions 

Table 4.5 below shows the sample’s perceptions on the most significant risks affecting their 

REPE fund. 

Table 4.5: In descending order, what would you consider to be the three most 
significant risks that affect the performance of the REPE fund? 

Factor Rank 1