The Real Deal New York

Fund managers double down on online real estate investing — but are they crowding out the little guy?

Institutional money could help crowdfunding startups scale and organize, but raise further doubts about the role of smaller investors

March 08, 2016 01:30PM
By Konrad Putzier

"Minions" (credit: Universal Pictures)

“Minions” (credit: Universal Pictures)

When real estate crowdfunding startups first emerged in 2011, their function was simple: match developers looking for equity with hundreds of small-time investors, directly online.

Since those early days, the industry has become considerably more diverse. Crowdfunding platforms branched out from equity investments to offer mezzanine and senior debt buys. Many now pool funds from unaccredited small-time investors with institutional money. One platform even launched a mortgage REIT. The latest step in the crowdsourcing evolution? The emergence of investment funds specializing in real estate crowdfunding platforms.

Insiders claim these funds make crowdfunding more attractive to investors and will help fuel growth in the industry. But like many innovations in the field, they also raise questions over the viability of the traditional crowdfunding model.

“The idea was: This is going to be a very fragmented space and that was creating challenges. Could we solve those challenges?” Ray Sturm, founder of AlphaFlow, told The Real Deal. In February, AlphaFlow launched what insiders believe is the country’s first investment fund focusing exclusively on real estate crowdfunding. Investors can buy a stake in the AlphaFlow fund, which will then invest that money in real estate projects through a number of crowdfunding platforms in return for a fee.

Sturm said he got the idea for the fund during his time at RealtyShares, a real estate crowdfunding startup he co-founded in 2013 and left at the end of 2014. Some users, he said, were happy to pick their own projects to invest in online – the basic premise of crowdfunding. But others would rather have some of their investments chosen for them.

“They still enjoyed picking equity deals one by one but when it came to debt they were happy to hand it off to the platform,” Sturm said.

AlphaFlow’s first fund has raised $5 million to date, according to Sturm, and plans to invest in a handful of crowdfunding platforms that issue senior real estate debt, including PeerStreet, Patch of Land and LendingHome. Sturm said the fund charges a 1 percent asset management fee and plans to charge carried interest (i.e. a share of profits) in the future, pending SEC approval. Separately from its fund, the firm also offers an online aggregator where users can track their investments across multiple crowdfunding platforms.

Funds specializing in crowdfunding more broadly have existed for years. In 2014, London-based P2P Global Investments became the first crowdfunding investment trust to list on a major stock exchange. That same year, Texas-based fund manager Ranger Capital Group began investing in peer-to-peer loans (the term for crowdfunded debt). Today, Ranger runs two peer-to-peer funds with a combined $250 million under management.

Initially, Ranger focused on peer-to-peer consumer loans. But today real estate makes up 30 percent of the firm’s crowdfunding investment, said Bill Kassul, a partner Ranger. “We actually anticipated real estate being a much smaller part of the portfolio,” Kassul said. “We like the space and we love the short terms on it.”

Ranger’s funds focus on short-term bridge financing with target yields between 10 and 12 percent. Last May, it agreed to invest $30 million through New York-based Sharestates – a target it has since surpassed. Sharestates’ co-founder Allen Shayanfekr called the agreement a milestone for the startup. “It brings more validity, more traction to the platform,” he said. The firm has raised close to $100 million for its investments since then – the vast majority from institutions like Ranger.

Crowdfunding entrepreneurs interviewed by TRD all believe that funds like AlphaFlow will soon take up a much more dominant role in crowdfunding. This could be a blessing for the industry: Combined with cash from hedge funds and other institutions, these funds allow crowdfunding startups to grow more rapidly than they would if they were to rely solely on small-time investors.

“It helps us scale significantly,” said Jason Fritton, co-founder and CEO of crowdfunding platform Patch of Land. Crowdfunding platforms often face the dilemma that borrowers tend to need funds quickly, but raising money from hundreds of small-time investors often takes time and comes with uncertainty. Investments from institutions are often far more predictable, Fritton argued, making it easier to quickly commit funds and win business, all with increased cash in hand.

“I do think it’s attractive for us because it expands our investor base, and that’s something we’re always looking to do,” said Marious Sjulsen, president of crowdfunding startup EquityMultiple.

But the growing influence of funds also raises questions over the viability of the traditional real estate crowdfunding model. Critics have long cautioned that real estate is too complicated and diverse for lay investors to make informed decisions online.

If crowdfunding is really so safe and simple that all you need to do is go online, look at a few charts and numbers, invest your money and wait for the returns to come in, then why would you even need an expensive fund manager to vet these projects and invest your money for you?

Fritton countered that the rise of funds doesn’t necessarily challenge the traditional model. Some savers who lack the time to vet individual offerings now have a way to still invest in crowdfunding, the general argument goes, he said. And those who prefer to pick their own real estate projects online may take comfort in the fact that professionally managed funds invest through the same platform. Both factors could make crowdfunding startups more attractive to investors and broaden their customer base, he said.

“We are starting to see a significant push not just from smaller funds, but also some of the larger institutional funds that specialize in the peer-to-peer environment pushing on the real estate side,” Fritton said.

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