Real estate private equity: the case of US unlisted REITs

Purpose The purpose of this paper is to demonstrate how fixed‐share prices, as a structural flaw in private equity funds targeted to small‐unit investors, economically disadvantages those investors in favor of sponsors. Design/methodology/approach The theoretical model incorporates fixed share prices with continuous investment opportunity and evaluates the wealth transfer from long‐term investors to marketing affiliates and soliciting dealers in the form of fees paid on the sale of shares to follow‐on investors. Findings This result holds in the presence of high‐payout dividend policy that attempts to compensate for wealth transfer. Research limitations/implications Should share prices be marked‐to‐market using real estate appraisals or another method, the unlisted REIT and related offerings, such as tenant‐in‐common funds, will be profitable for sponsors without economically disadvantaging long‐term investors. Practical implications The findings from this research are useful to fund sponsors who design real estate investment products for small‐unit investors. These products may retain the advantageous characteristics of existing products while eliminating the disadvantageous features. Originality/value This is the first academic research on private equity capital raised from small‐unit investors.