Part IV of a multi-part editorial series, the Watermark Team is defining what we like to call “The Watermark Advantage.” In the non-stop cacophony of noise reverberating from real estate industry regarding options, opportunities and advice, we want to highlight how Watermark is unique and why our partners choose to entrust us with their investments.
At the inception of the Watermark blog, our very first article highlighted the numerous advantages of investing in Private Equity Real Estate over public equities; diversification, hedging against inflation, owning tangible assets, and increased earnings potential to name a few. Investing in private equity real estate can be incredibly beneficial for any investor’s portfolio. Over these last few weeks, we have transitioned to “The Watermark Advantage” series, which explores the competitive advantage Watermark provides over other private equity real estate investment opportunities.
Building upon these two ideas, it is no surprise that one of the principal driving forces behind Watermark Equity Group is the insatiable desire to create an unparalleled investment experience centralized on the premise of genuinely placing the needs of our Partners first. Admittedly, this claim is neither novel nor uncommon amongst investment groups. Here at Watermark, we prefer to let our actions do the talking.
One of the first things any investor examines when considering a private equity real estate fund are the fees. There is a whole spectrum of fees that are typical to such investing, and it is important that investors understand what they are and how they work. More importantly, it is paramount to understand what fees tell you about the underlying investment.
The Buffet of Fees
The chart below outlines some of the fees investors have come to expect from private equity real estate funds.
It’s typical for funds to have a 2-3% upfront fee, as well as a recurring annual fees in the range of 1-3%. These add up. For example, let’s assume a $500,000 investment in a fund consisting of a 3 year hold period. Before this investor has a chance to take another sip of coffee, he or she is hit with $15,000 worth of upfront fund formation* and administrative fees**. If we assume recurring fees of 2.5% on just the original capital contribution, this investor could also be paying upwards of $37,500 during the course of the investment. Add it all together, and this investor just paid $52,500, over 10% of his original capital contribution, in fees.
The message from other investment companies is clear: sponsors want to guarantee their returns regardless of how the fund performs. Sponsors get paid first, and Partners are second.
The Watermark Advantage
The Watermark experience is different. We only win when our partners win. This “Partner First” approach manifests itself in many ways, but it’s most evident in our fee structure. We have one annually recurring 0.5% operational expense fee and that is it. The purpose of this fee is to offset the costs Watermark incurs for operating each partner’s account such as state fees, renewal fees, CPA costs, etc. Watermark gets paid after our Partners have received their profit distribution when the fund performs and does what Watermark says it is going to do.
We believe in this winning approach for a couple reasons. First, it is emblematic of our sincere commitment to our Partners. We want to honor our Partners for their commitment to us, so our Partner-first mentality is akin to that of a reciprocating friendship. Second, it further motivates Watermark to perform on its promises. If we are paid up front, we might not be as driven to achieve optimal performance. If we only win when our fund and our Partners first succeed, that is all the motivation we need to dedicate our very best to finding the best designs, best contractors, and best results.
A lot of funds are willing to say “Partners First.” At Watermark, we live it.
To learn more, reach out to Watermark Equity Group today!
*Fund Formation fees usually consist of start up costs associated with legal, marketing, accounting, and travel costs for a fund offering
**Administrative fees consist of start up costs associated with software, employee wages and benefits, and other operational costs
Mike is the Finance Director of Watermark Equity Group. Since graduating Wheaton College (IL) with degrees in Business and Economics, Mike was active in community development and was a professor of business studies before joining Watermark in 2017.