The Role of Financial Leverage in the Performance of Private Equity Real Estate Funds

Posted: 8 Feb 2013 Last revised: 20 Feb 2014

See all articles by Jamie Alcock

Jamie Alcock

The University of Sydney Business School; Centre for International Finance and Regulation (CIFR)

Andrew Baum

University of Oxford, Said Business School

Nicholas Colley

Property Funds Research

Eva Steiner

Cornell SC Johnson College of Business

Date Written: May 10, 2013

Abstract

We 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 Jensen’s alpha, leverage and, for the first time, specific managerial skill as it relates to timing leverage decisions to anticipated future market 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 Jensen’s 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, but iv) in the short term, managers do seem to add significantly to fund excess returns by effectively timing leverage choices to the expected future market environment.

Keywords: Private equity real estate funds, performance analysis, financial leverage

Suggested Citation

Alcock, Jamie and Baum, Andrew and Colley, Nicholas and Steiner, Eva Maria, The Role of Financial Leverage in the Performance of Private Equity Real Estate Funds (May 10, 2013). Journal of Portfolio Management, 2013, 39(5), 99-110. Available at SSRN: https://ssrn.com/abstract=2213190 or http://dx.doi.org/10.2139/ssrn.2213190

Jamie Alcock

The University of Sydney Business School ( email )

Cnr. of Codrington and Rose Streets
Sydney, NSW 2006
Australia

Centre for International Finance and Regulation (CIFR) ( email )

Level 7, UNSW CBD Campus
1 O'Connell Street
Sydney, NSW 2000
Australia

Andrew Baum

University of Oxford, Said Business School ( email )

Park End Street
Oxford, OX1 1HP
United Kingdom

Nicholas Colley

Property Funds Research ( email )

6 St Giles Court
Southampton Street
Reading, RG1 2QL
United Kingdom

Eva Maria Steiner (Contact Author)

Cornell SC Johnson College of Business ( email )

465B Statler Hall
Ithaca, NY 14853
United States

HOME PAGE: http://https://sha.cornell.edu/faculty-research/faculty/ems457/

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