Why Wealthy Investors are Turning to Private Equity Real Estate

Eric Wilson

Managing Partner

January 8, 2024

4 min read

Eric Wilson

Managing Partner

January 8, 2024

5 min read

The strategies of high-net-worth (HNW) and ultra-high-net-worth (UHNW) investors often set the trend for many investors following their lead. Currently, there's a noticeable shift towards private equity and real estate investments. This article explores this trend and its implications, especially for those interested in private equity real estate.

Understanding the Wealthy Investor

To begin with, HNW individuals are defined as those with at least $1 million in liquid assets, while UHNW individuals boast over $30 million. These groups, particularly influenced by baby boomers, Generation X, and millennials, display varied investment practices influenced by their wealth level and age. Ron Diamond, who heads an eponymous wealth advisory for family offices with more than $250 million in assets and is the family office chair for national HNWI network Tiger 21, highlights the ongoing generational wealth transfer, emphasizing the increasing interest in private equity.

Changing Investment Strategies

Historically, HNW investors have allocated around 50% of their assets to stocks, 20% to bonds, 25% to alternatives and 5% to cash, global investment firm KKR noted in 2021. However, Diamond said alternatives have begun to claim more of the UHNW portfolio in the past 10 to 15 years. UHNW investors have allocated around 30% to stocks, 10% to bonds, 50% to alternatives and 10% to cash, according to KKR. UHNW investors now show a significant lean towards alternatives, especially in private equity and real estate. Younger, wealthy investors, often with unique wealth creation stories, are increasingly drawn to nontraditional investments.

Source: KKR 2020 HNW Survey

The Allure of Real Estate and Alternatives

The allocation towards real estate and other alternatives correlates with the level of wealth. Notably, 81% of UHNW households invest in alternatives, compared to 14% of mass affluent households. This trend underlines a strategic approach used by the wealthy to grow and preserve their wealth, leveraging their higher investible cash, connections, and access to exclusive opportunities.

Private real estate supports UHNW individuals’ investment strategy in multiple ways. It offers investors:

  • Diversification and risk management through low-volatility, low-correlation alternatives to public equities;  
  • Passive income that can provide a stable cash flow from rents;
  • An inflation hedge;  
  • Returns that can provide stability in uncertain economic conditions;  
  • The greater control and value-add opportunities of direct investment; and  
  • Tax advantages from depreciation and the way capital gains are taxed.  

Real Estate: A Growing Focus

Real estate has seen an uptick in interest from wealthy investors. Wealthy investors have always been attracted to real property, but in the past generation real estate and development have claimed a greater share of their portfolios. Private equity real estate assets have achieved a 10% compounded annual growth rate over the past decade, Bain Capital’s 2023 Global Private Equity Report noted. Institutions may have reduced their real estate investments recently, but private equity investors have been less defensive, maintaining a strong presence in the market.

Economic Downturns and HNW Investment Habits

Economic uncertainties often reshape investment patterns. Despite a general slowdown, high-net-worth investors continue to dominate the commercial property investment landscape. Our research at Freedom Venture Investments echoes this resilience, showing that real estate remains a robust option even during downturns.

Conclusion And Looking Ahead

Interest rates are set to play a critical role in investment decisions in 2024. You can read more about our predictions for the year ahead in our market outlook blog from last month.

The shift in investment patterns among the wealthy towards private equity and real estate is a pivotal trend. This move reflects a strategic approach to wealth growth and preservation, offering lessons for all investors. For those in private equity real estate, understanding and adapting to these trends is crucial for navigating the success of their own portfolios.