That playbook remains relevant. However, more challenging market conditions and the increasing operational intensity of many real estate sectors have placed greater emphasis on what happens after acquisition: execution of the business plan and the capabilities of the team responsible for it. Moreover, in a difficult fundraising environment and a highly competitive landscape for brokered deals, it has never been more important for capital allocators to have direct access to dependable pipeline and entrée to sector specialists that are fully aligned with their partners and can identify and execute on qualifying opportunities.

Institutional capital is consequently increasingly targeting not only real estate assets, but also the businesses, teams, systems and contractual arrangements through which those assets are sourced, developed, operated and managed. In the right sectors and structures, platform investing can provide exposure to both property-level returns and enterprise-value growth, while giving investors access to specialist operating capabilities that would be difficult to quickly recreate internally.

Why capital allocators pursue platforms

In previous cycles, investors could often succeed by allocating to the right sector, financing on attractive terms and timing the exit well. In the current higher-cost cycle, value creation depends increasingly on active asset management, delivery of the business plan and operating performance. Moreover, in a competitive fundraising environment, it is increasingly important for capital allocators to be able to differentiate themselves from their competitors by having exclusive access to best-in-class operating teams with captive and exclusive deal pipeline, particularly when a sector becomes in-demand. That change rewards a different set of capabilities, including:

A platform premium is not automatic. Indeed, many platform focused investors underwrite little to no additional return in respect of their operating company investments and instead allocate any additional benefits to their real estate return. For these investors, simply ensuring a lower-all-in fee load at scale, gaining access to an exclusive and proprietary pipeline and a team that has a proven ability to execute thereon, and, perhaps most importantly, ensuring alignment between capital and operator in terms of the merits of pursuing potential opportunities, can justify the additional platform investment dollars alone. 

However, the other investors, including dedicated GP-stake investors, may underwrite a standalone return from fee income and other platform earnings. In either case, platform earnings can only be justified where the relevant capabilities and earnings are durable and capable of being scaled. 

The following factors can increase the desirability of platform investments:

For example, life sciences assets can benefit from being located within the right ecosystem near research institutions, universities, talent and complementary occupiers, and from specialist expertise in technical design, fit-out, amenities and leasing. A specialist platform can not only coordinate and reproduce those capabilities across multiple assets but also leverage relationships in the sector built over years or even decades to curate its investment pipeline and execute a business plan. 

In each case, an established platform may generate advantages that a single asset may struggle to replicate.

Why real estate platforms partner with capital

There are also compelling reasons for real estate operating companies to pursue these structures. The current market cycle, which has featured persistently high interest rates, rising asset prices and a difficult capital formation environment, has exerted competitive and cost pressures on real estate operating platforms across sectors. In the typical joint venture structure, fee income (acquisition fees, asset management fees and, most significantly, promote) is inherently volatile and tied to deal activity. When deal flow slows, as it has in the current higher-rate environment, the core economics that fund an operating platform’s salary and overhead costs, or its “G&A” load”, come under pressure, adding another challenge to a landscape that already imposes increasing regulatory complexity and the age-old succession conundrum for these sponsors. 

At the same time, the value of being close to the real estate has never been greater: passive investors are growing frustrated with double layers of fees and diluted returns, intermediaries and allocators are falling out of favor, and proprietary pipelines and distribution channels (those not reliant on heavily brokered deals) are at a premium.

Selling a stake to a platform investor can provide a more durable solution to many of these challenges: 

As the market for platform transactions matures, we expect these structures to become an increasingly important part of the real estate capital markets landscape.

Deal types and underwriting

"Platform" is an umbrella term rather than a single legal or economic model. It may describe an integrated owner-operator holding both real estate and a related operating business; a manager together with related general partner or carry vehicles generating management-fee and carried-interest economics, and its underlying co-investment vehicles; or a programmatic joint venture through which an operating partner deploys third-party capital (often alongside its own minority co-invest) while retaining ownership of its own business. The distinction matters because investors are underwriting different cash flows, rights and liabilities in each case.

Platform transactions can therefore take several forms: control acquisitions of owner-operators or managers; minority growth investments in operating or management businesses; GP-seed or GP-stake investments (sometimes accompanied by a "stapled" fund commitment); recapitalizations combining liquidity for existing stakeholders with fresh growth capital; and strategic, programmatic joint ventures through which an investor backs a team and its model over multiple investments or even the formation of brand new co-owned platforms through a lift-out or on the heels of another liquidity transaction. While most platform investments in the real estate sector involve real estate in some form or fashion – recapping existing vehicles, the creation of a parallel venture or fund structure as an equity capital outlet or other – there have been an increasing number of transactions that are specific only to the platform.

In each case, rather than acquiring a single asset or scheme, investors are increasingly backing the team and operating model responsible for sourcing, developing and managing a portfolio over time. Sponsors and operators that can demonstrate a repeatable sourcing and execution model may be able to attract committed capital on a repeat basis rather than raising capital asset by asset.

One technical question is what forms part of the transaction perimeter. Depending on the model, the platform may comprise a manager or GP, carried-interest or promote vehicles, an operating and employment company, a brand, intellectual property and data, material management and services contracts, regulatory permissions, and any property-owning vehicles and/or seeded portfolio (the valuation exercise can be quite different between real estate and platform earnings). The parties must identify which people, rights, liabilities and services are being transferred, retained or shared. This can be even more complex when the subject real estate platform has a parallel sister business and shared services are provided between the two.

Diligence therefore extends beyond the underlying real estate to the management team, key-person dependency, scalability, material contracts, change-of-control consents, employment and incentive arrangements, intellectual property, technology and data, regulatory status and liabilities within the operating or management business. Acquisitions may also require consents under fund, joint venture, financing, management and operating arrangements, and potentially regulatory approvals.

Governance can also be complex. The platform level transaction documents may need to address the investment remit and capital commitments; decision-making at platform, and asset level; opportunity allocation and exclusivity; fees, promote and related-party arrangements; delegated authority; conflicts; key-person and change-of-control protection; defaults and consequences; and the routes to liquidity and exit. Control rights are necessary to protect institutional capital, while still allowing management to remain operationally agile and entrepreneurial. Moreover, for capital providers that make investments in real estate platforms through their closed-end discretionary funds, these platforms, which may continue across investment cycles, can drive complex considerations on the allocation of future value created by the platform beyond the investing funds’ term, including how that value is reflected on exit. 

Management incentives and in some cases post-investment earn-outs can help create alignment and bridge differences in initial valuation. 

[insert quote from [Mo Saraiya, Global Head of Platform Investments and Co-Chief Investment Officer, Madison International Realty]] 

Increasingly, both real estate investors and real estate operators are recognising the real estate platform investment structrure as a source of value creation – and we see this trend continuing.