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A question I’m often asked involves the merits of investing in private real estate as an alternative to publicly available REITs (the latter vehicle is our recommendation). To answer that question, I will turn to the historical evidence, which we have courtesy of Cambridge Associates.

Cambridge Associates’ private investment database is an extensive collection of institutional-quality private fund performance. It contains historical performance records for more than 2,000 fund managers and their more than 7,300 funds. In addition, it captures the gross performance information of more than 79,000 investments underlying venture capital, growth equity, buyout, subordinated capital and private equity energy funds.

Cambridge Associates’ database allows us to compare the performance of these institutional private real estate funds with the performance of publicly available REITs. For the 25-year period ending 2017, private funds in the database returned 7.6%, while the FTSE NAREIT REIT All Equity Index returned 10.9%. For the privilege of investing with the greatest institutional managers, many of whom are not available to the general public, and in return for sacrificing the daily liquidity available with public REITs, the private, illiquid institutional investments underperformed by 3.3 percentage points a year for 25 years.

As bad as that sounds, the reality was actually far worse. The reason is that the private real estate investments used much higher amounts of leverage.