On the Performance of Core, Value-Add and Opportunistic Private Equity Real Estate Funds: The Art of Financial Leverage

We employ an original dataset of primary fund information to examine the performance of 162 global private equity real estate investment funds across the core, value-add and opportunistic investment style categories over the most recent property cycle (2001-2011). We employ a multi-factor asset pricing model to measure the impact on the funds' total excess returns of the underlying real estate market, broad managerial skill captured by 'alpha', overall financial leverage and, for the first time, specific managerial skill as it relates to timing leverage decisions to anticipated market and economic trends.We find evidence consistent with the hypotheses that i) fund performance is almost directly proportional to the return on the underlying real estate market, ii) managerial skill as measured by 'alpha' can be virtually fully explained by fund style, leverage, sector and geography, iii) leverage cannot be viewed as a long-term strategy to enhance performance, and iii) even in the short term, managers do not seem to add value by timing leverage choices to the market and economic environment.