A Rising Private Asset Class: Core+ Real Estate Debt

Abstract

The Global Financial Crisis (GFC) disrupted the real estate (RE) debt market and triggered a retrenchment by traditional lenders such as commercial banks. Since then, this financing void has been filled by private fund vehicles – particularly within the core+ RE market – which has enabled growing institutional investor allocations to private RE debt. CIOs managing a multi-asset portfolio with allocations to both liquid and illiquid assets need to evaluate the cash flows from each asset class to better understand their portfolio’s liquidity risk. However, due to the specific cash flow pattern of core+ RE debt funds, and a lack of publicly available data, commonly used cash flow models for other private assets such as private equity (PE) are not suitable. We present a new cash flow model for private core+ RE debt funds. Our aim is to model a fund’s key cash flow dynamics using reasonable, practitioner supplied parameter estimates. As data become available, we expect to update the parameter values. The model incorporates sensitivity to the economic environment both at fund launch and over the fund’s life. This core+ RE debt cash flow model can be integrated into a multi-asset portfolio analytics tool such as the PGIM IAS asset allocation framework OASIS TM to help CIOs evaluate the diversification and liquidity management potential that private core+ RE debt may bring to their portfolios.