NEW YORK CITY—Things are moving fast for real estate crowdfunding. I recently wrote this article on Globest.com. In case you missed it, my point was that institutional players had not made a move into the crowdfunding space, opting instead for a timid “wait and see” approach: let the smaller guys try it first.
Little did I know: while I was writing my article, the Carlton Group, a major real estate private equity shop, was working on its own crowdfunding platform. Granted, the “crowd” they are targeting is the $1-million minimum kind of crowd. Nevertheless, this is a bold and significant move in the industry and a step in the right direction. Here's why:
- Gaming an Entire System
By going straight to the (ultra) high-net-worth investor and family office, Carlton is bypassing an entire network of intermediaries that has persisted for years in the industry, including placement agents, funds, feeder funds, and even some investment advisors. Surely, Carlton's move will raise a few eyebrows, but both Carlton and the end-investors will end up saving significant costs by disintermediating their transaction.
- Being the First: Positioning and Know-How
Getting in the game early has its benefits: not only is Carlton positioning itself as a leader among its peers and getting to its target investor base first, but it is also gaining significant know-how to play this new-to-all general solicitation game.
- Increasing Brand Awareness and Expanding Its Investor Network
Just Google Carlton group and you will see how many crowdfunding-related results you get. Being online, creating buzz, and adding smaller investors to its capital base will become a virtuous circle of generating further awareness and adding more investors.
- Deleveraging Its Balance Sheet (Especially Nice When Interest Rates Rise)
Equity crowdfunding offers Carlton a low-cost alternative to finance its deals or deleverage existing ones. In a rising interest rate environment, it is priceless to have another readily available source of equity capital. The larger Carlton's investor network grows, the larger its capital base will get.
- Using Less of Its Own Capital and Increasing Riskless Fee Income
By the same token, a large investor network means using less of its own capital for its deals. Freeing up capital will not only translate into more deals, but into generating additional riskless fee income. Not bad.
- Greater control
A more widespread distribution of its deals will only result in better terms, as no one investor will have too-strong a bargaining position.
- A Scalable Way to Reach a Global Audience
Granted, Carlton has offices in many places all over the world and its investor relations executives can fly anywhere. However, nothing beats the convenience and reach of the internet. Carlton now has immediate access to anyone with a mobile phone or a computer. That's a big deal.
Carlton's move into crowdfunding (or direct investments) is bold and strategic. More firms are likely to follow. The game is on.
Stefano D'Aniello is co-founder and COO of Groundbreaker. The views expressed in this column are the author's own.
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