2013 Fundraising for Direct Investments Tops $24.6 Billion, Shattering Record

ELLICOTT CITY, Md., Jan. 13, 2014 (GLOBE NEWSWIRE) -- Investor demand for public non-listed real estate investment trusts (REITs), non-listed business development companies (BDCs) and other direct participation programs (collectively, Direct Investments*) in 2013 exceeded $24.5 billion, an all-time record, according to The Investment Program Association (IPA), a trade association for Direct Investment vehicles, and Robert A. Stanger & Company, an independent investment banking firm that specializes in direct investment securities. Data developed by Stanger show equity capital flows to Direct Investments in 2013 were up $11.2 billion from the 2012 total of $13.4 billion – an 84% year-over-year increase.

"Three primary factors helped the Direct Investment industry attain this level of popularity among retail investors and their advisors," said Kevin Gannon, managing director of Stanger. "The evolution of this relatively young industry will ultimately lead to substantially higher levels of investment in coming years."

The first factor that contributed to the successful fund raising was the liquidations of non-listed REITs formed in prior years which have produced attractive total returns to investors. Second, investors are attracted to the continuing yield advantage of real estate and private corporate development loans over more traditional fixed income investment alternatives. These yields are typically 6% or more. Third, the continuing uncertainty of the impact of macro-economic forces on the stock market makes portfolio diversification attractive to investors.

"Allocating funds to direct investments, which have low correlations with financial market instruments, is a logical and productive strategy in the current economic climate," said Kevin M. Hogan, President and Chief Executive Officer of the Investment Program Association. "Investors continue to prefer reliable current income to the pursuit of more speculative growth, and the significant yield advantage available from most Direct Investments continues to attract investors seeking current income," said Hogan.

"Despite stock market indices producing returns of as much as 29% in 2013, investors continue to be judicious in their pursuit of wealth-building strategies," said Keith Allaire, a managing director of Stanger. "Corporate profits and balance sheets are extremely healthy, but the bullishness of investors and advisors is somewhat tempered by a lingering concern over what may be a Fed induced mini-bubble. That concern translates into a portfolio strategy which sustains allocations to hard assets," said Allaire.

What was a kaleidoscope of geopolitical, economic, fiscal and monetary uncertainties has resolved somewhat over the past few months. While the long-term implications of the Arab Spring on Middle East security and world oil markets are still clouded, the immediate threats of Syrian chemical arsenal and Iran's development of atomic weapons have been forestalled. Congress has approved a budget and a debt ceiling compromise appears more likely. "Considerable uncertainties remain which justify a prudent investment allocation to Direct Investments," said Gannon. "Those include the pace and sustainability of the U.S. economic recovery, the rate of the Fed's downsizing of quantitative easing, potential revisions to the tax code, and the longer-term potential for inflation."

Industry Evolution

The Direct Investment industry's increasing annual investment rate—from around $6 billion to $7 billion in the mid-2000s to over $24 billion in 2013—reflects an evolution of the product, more robust education of financial advisors and investors to the potential benefits of the various classes of Direct Investments, the introduction of non-traded public business development company products to this market, and the emergence of a successful investment record for the industry following the bursting of the real estate valuation bubble in 2007.

"The most significant factor lifting the industry to new levels of equity fundraising is successful liquidity events," explained Gannon. Liquidity events can take the form of portfolio sales, mergers or listings of matured non-listed REITs formed in prior years. These events provide either liquidating cash distributions to investors or shares of a publicly traded company which can then be sold on a national exchange. During 2013 seven non-listed REITs provided liquidity events which returned over $16 billion of equity to their investors.

"These successful liquidity events have both motivated investors in these non-listed REITs to commit capital and reinvest in new programs organized by the same sponsor," said Hogan, "and confirmed for financial advisors the ability of Direct Investments to provide growth along with above average current income."

Stanger reports that approximately $6.5 billion of non-listed REIT liquidations/listings have been announced and are anticipated to close during the first quarter of 2014.

Non-Listed REITs and BDCs Have Record Setting Year

Approximately 80% of total capital raised by Direct Investments in 2013 was committed to public non-listed REITs. Prior to 2013, the highest annual total for non-listed REIT investing was $11.5 billion in 2007. Cumulatively, since the year 2000, over $105 billion of equity capital has been invested in non-listed REITs.

The non-listed REIT industry has become a primary incubator for listed REITs. Since the year 2000, the non-listed REIT industry has raised approximately three times as much new capital as traded REIT IPOs. When secondary offerings are included in the traded REIT total, non-listed REITs have accounted for approximately 30% of total annual investment in the public REIT industry. "The non-listed REIT product has demonstrated considerable capital raising resiliency relative to the traded REIT product, especially when equity markets are in flux," said Allaire. "In coming years as the product evolves, the industry is likely to see the entry of more real estate asset management companies seeking to enhance their all-weather access to capital and develop a new channel to retail and retirement investors."

BDCs, which were introduced into the independent broker dealer channel as recently as 2009, have grown to become the second largest sector of the public Direct Investment marketplace. These investments provide financing for growth to businesses in a wide variety of industries which are otherwise capital constrained. "BDCs have become a staple of the direct investment market," said Hogan. Investment in BDCs set a record in 2013 of $4.8 billion, up from $2.8 billion in 2012.

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

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

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

______________________________________

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