Pension funds and other institutional investors constantly search for the right fiduciary partners to trust with their money. This selection process can be robust and unbiased or lax or even motivated by political priorities. What’s surprising is how different the outcomes are for real estate fund managers vs. managers in other private equity strategies. Real estate fund managers often keep raising capital even after stark relative and absolute underperformance. Recent research helps explain why, and the surprising “benefit” real estate fund investments may provide to their LP backers.¹

For context, LPs screening, selecting, recommitting to and sometimes leaving fund managers has become a standardized way to deploy institutional dollars. In the private equity universe, those investments principally go to three types of fund managers: venture capital funds, buyout funds and real estate funds.

You would think the allocations to these funds would follow a returns-driven logic. Highly competent fund managers with strong historical performance would grow and attract new capital in new offerings. Poor performers would be unable to raise capital and eventually have to exit. Over time, the skillful GPs would survive while the average (and the “just lucky”) ones do not.

Significant industry infrastructure has been created to effectuate just this type of culling of unsuccessful fund managers. Independent returns benchmarking, third-party consulting and advisory firms, and robust due diligence processes all exist to help LPs sort the great GPs from the not-that-great.

And this system should be particularly rewarding to high-performing real estate fund managers. Greater access to capital in a capital-intensive business unlocks advantages like better financing, lower operating costs, and access to unique opportunities. That contrasts with VC funds which often don’t see the same benefits of scale as fund size grows.

The research examined the three types of PE funds in the aggregate and individually, looking for evidence of this survival-of-the-fittest ecosystem. They found some sobering results.

First, a big disparity in returns. Buyouts performed best on an absolute and relative return basis, with a mean IRR of 14.5% and excess return over a public benchmark (“direct alpha”) of 4.56%. VC returns come with “significant variation with a strong right skew” but delivered a mean IRR of 10.92% and direct alpha of −2.30%. Real estate trails, with a mean IRR of 7.02% and a direct alpha of -4.63%, although real estate funds were much less risky, with a standard deviation in returns of 19% vs. 50% for VC funds. The supposedly higher-returning Value-Add and Opportunistic fund strategies, which comprise 70% of real estate funds raised, provide IRRs of 7.86% and 7.08%, respectively.

The underperformance of real estate private equity has been studied before, but what’s new here is examining returns through the lens of fund manager experience.

Overall returns for first-time fund managers are “quite good” in all three categories of private equity. As those managers raise new funds, fund size grows, but their returns diverge. Buyout funds grow five to eight times in size from the first fund to the seventh, and returns remain consistent. In other words, buyout funds scale well. Venture firms grow only ~2x from the first fund to the seventh, but surviving VC managers see performance improve "dramatically" – from 15% average returns to 30% for fund sequences six and higher.

Oh boy, real estate is different. Fund sizes grow three to four times from the first fund to the seventh, but after the fourth fund, returns fall on average with each successive raise. From the paper: “Performance declines from 16.4% for fund sequence #4 to 8.1% for fund #5, and then to 4.0% for fund #6. The mean return for funds #7 and higher is 5.0%.”

What’s going on? Wouldn’t poor-performing managers fail to make it to “funds #7 and higher”? Across private equity, high-performing managers survive and grow while lower-performing managers exit, often dramatically after raising a larger fund that bombs. But real estate funds “do not conform to the traditional narrative.”

More color: Although surviving real estate fund managers perform better than those that exit the market in funds one through four, the IRRs are not that different for the two groups, at 14.87% vs. 10.62%. Relatedly, real estate sponsors go on to raise an additional fund at rates 15-20% higher than in buyout or venture. And more strangely, starting with fund #5 through fund #7, most-recent-fund returns for GPs that exit the market are actually 6.55% higher than for GPs who go on to raise another fund. That’s the opposite of what’s supposed to happen.

Put simply, real estate fund managers deliver the worst returns of the three categories, survive the longest, and as a manager’s experience accumulates they provide worse returns with each successive fund.

Maybe it’s harder to evaluate real estate GPs vs. other fund managers? The paper studied different metrics of transparency and benchmarking across the three PE categories to test that. Evidence indicates that, over any seven-year evaluation period, plenty of data was available to evaluate fund manager skill; the information set was no different for real estate than for buyout and VC firms.

Despite the availability of abundant data, real estate LPs “appear to be slow learners.” Or… something else is going on. This phenomenon might actually reflect informed LP decisions.

The paper speculates real estate fund managers might be allowed to underperform because public pension funds are more heavily invested in real estate than the other product types, and because these entities are subject to “regulations, political influences and organizational frictions” that may impact fund manager selection. It's directionally plausible, but unsatisfying. . The authors also flag low salaries and staff turnover among pension fund employees as a potential issue when the investment cycle runs ten-plus-years; this may create “various forms of agency conflicts and behavioral inattention, leading to poor performance.” Again: plausible, but not very explanatory.

A better answer to the “Why?” question may be returns smoothing, something we’ve written about before. Real estate private equity reported returns are often quite stable, sometimes even appearing linear over time, which may mask the true risk of the underlying assets. Real estate, unlike buyouts and VC, is unique in that public REITs invest in many of the same types of assets as PE funds. And you can see the risk and volatility associated with public REITs quite clearly. This leads the paper to its core suspicion:

“The fact that PERE has a closely parallel public market alternative in the form of REITs actually seems to increase LP investor aversion to observed price volatility, which has apparently created incentives for pension fund investors to pay an illiquidity premium to RE fund managers who are capable of generating predictable performance outcomes.”

An illiquidity premium! Honestly, this is why we like writing these things: You never know what you're going to find.

Taken together, these findings point to an uncomfortable possibility: well-documented persistent underperformance in real estate private equity may be a feature, not a bug. Real estate funds appear to offer something institutional investors value alongside (or even above) returns; otherwise, we wouldn’t see the universe of operators and funds that exist today. That doesn’t keep great fund managers from excelling, but if true, it dampens the pressure for firms to innovate and push for higher performance. That seems to characterize a lot of the real estate funds we know, and sadly, that’s an outcome that’s especially bad for the pensioners who trusted everyone else with their capital.

Who: Stonethrow

What: Another modern twist on the country club - this one an office-building takeover designed for families.

The Sparkle: We’re watching a wave of new “third-place” social and affinity clubs pop up across the country. Some focus on traditional country club amenities at lower cost, some are golf-centric, some are outdoors-oriented, and Stonethrow, opening in 2027 in Dallas, is built around families (and kids). The founders are repositioning a suburban office building into a family-amenity-rich country club, complete with a resort-style aquatic center, indoor fields, a restaurant and abundant staffing so you can let your kids run around without worry. Early pricing, last we heard: a $2,000 initiation fee and $500/month. Thanks to our friends at Thesis Driven for writing about Stonethrow previously!

Children’s books often have animal characters, and one study we found recently wondered if those animals more often were depicted as male or female. The answer: Most animals are guys. Only birds, ducks and cats are more often female. The most masculine? The frog. 🐸🐸

Link: https://pudding.cool/2025/07/kids-books/

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