It's no surprise that private capital formation has outpaced public market fundraising since the financial crisis. New layers of financial regulations make unregistered securities more attractive, and the general trend toward private wealth continues.
A new report from the U.S. Securities and Exchange Commission released before the government shutdown confirms as much and more. The report analyzes private capital formation between 2009 and 2017, specifically looking at non-publicly traded securities offered by issuers relying on Regulation D of the federal Securities Act. The vast majority of private capital is raised in the Reg D market, including by real estate syndicators and operators who conduct so-called “private placements” to secure equity and debt.
The SEC report focuses on the whole market, of which real estate is a part—the third largest sector behind financial and technology. The report doesn't disaggregate the results by sector, but the data and analysis are illuminating for real estate market participants. Some key takeaways:
- In 2017, the number of Reg D filings hit an all-time high. There were 37,785 offerings reported on Form D filings, accounting for more than $1.8 trillion of new capital raised. New filings represented 24,476 of the total volume of filings.
- Issuers in non-financial sectors (primarily operating firms, including commercial and multifamily property operators) raised $105 billion in 2017. Among financial issuers, hedge funds raised $382 billion and private equity funds raised $582 billion, a portion of which was directed to real estate.
- The median offering size was less than $1 million.
- Investors made 398,000 bets on Reg D offerings in 2017. This appears to be an all-time high, though the number is not net of duplicates, in other words, people who invested in more than one offering.
- Nonaccredited investors participated in only 9 percent of Reg D offerings.
- The use of more recently created and amended exemptions under the JOBS Act has been light, but the number of alternative filings is growing.
Reading Between the Lines
The report, first and foremost, confirms how massive and fast growing the market is for private equity and debt investment. This is how capital gets raised in the U.S.
While the report addresses crowdfunding, it doesn't explore the extent to which capital is being raised online per se. Yet, we know from participants in the market that more operators and sponsors are moving their fundraising online and automating investor relations using cloud-based software, which may partially explain the growth of the market.
Related, the report suggests that the number of people investing in private placements is growing faster than the number of offerings. There is not sufficient data in the report to draw this out conclusively, but the data clearly points in that direction. The data also suggests that more people are making multiple investments, presumably at least in part because of the ease with which investments can now be identified and consummated online.
The slow growth of the crowdfunding market for nonaccredited investors is not entirely surprising. First, despite the JOBS Act and resulting regulatory policy changes, fundraising to nonaccredited investors still carries a pretty big disclosure and compliance burden, which translates into cost and risk. Second, and perhaps more important and obvious, if a sponsor can raise more money from fewer wealthier (accredited) investors, why wouldn't he or she?
Stay tuned for updates to these numbers… hopefully soon after the government reopens.
Cary Brazeman, a former executive with CBRE, is a principal of CRELIX Marketing Partners. CRELIX is a national marketing public relations firm that specializes in real estate, finance and technology, including the online real estate investing market. The views expressed here are the author's own and not that of ALM's Real Estate Media Group.
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