What is a separate account versus a commingled fund for institutions?
Short answer
A separate account is a portfolio run for one institution, with terms negotiated for that investor alone. A commingled fund pools money from many investors into one vehicle with one set of documents. I have heard sponsors describe working with pensions and endowments both ways. Separate accounts give the investor more say. Commingled funds are simpler for the manager to run.
Picture one pot of money with many investors in it. That is a commingled fund. Investors generally sign the same documents, often pay a similar fee schedule and usually exit on the same timeline. Now picture a single institution that has its own account with a manager. The terms are set for that investor only. That is a separate account.
How big institutions have used separate accounts
On a panel of real estate sponsors I hosted, one of them described 30 years of raising capital from every kind of source. Institutions were part of that story.
"We've worked with pension funds. We've had separate accounts with CalPERS. We've had endowment separate accounts with Brown, Harvard, and Yale."
This clip shows a sponsor describing pension and endowment separate accounts, and what they learned from them.
That same sponsor also said the cycle of institutional money created friction. A private equity partner may need to exit at a certain year because of a mandate. A pension may not want to hold an asset through a down cycle. They said they had trended back toward individuals and other family offices for that reason. I would read that as one sponsor's experience. It is not a rule for every manager.
Why institutions went through funds, and why that is shifting
A commingled fund has an obvious appeal for an institution. One round of due diligence covers the whole vehicle. Ryan, who speaks at our events, put the history plainly.
"Typically, institutions have been forced to go through funds because they can't afford the one-off due diligence, but the trend is moving to them doing direct investments, too, just like family offices."
Ryan also said the smaller institutions or the really innovative ones are usually the ones asking for direct deals. In a direct investment, they approve things deal by deal. In a fund, they trust the manager to follow the mandate. A separate account sits between those two. The institution is the only investor, though the manager generally still makes the investment calls inside agreed guidelines.
What a sponsor needs in place first
Either structure asks a lot of the manager. John told me that when institutions first came knocking, he had no audit, no third party advisers, the wrong legal counsel and no fund administrator. He had to build all of it.
John explains the audit, legal and administration work he had to add before institutions would invest.
Summary and key takeaways from this video
His view was blunt. Without an institutional platform, you will not raise institutional capital. He also said institutions use third party due diligence firms, and you have to pass their requirements. That applies whether the money goes into a pooled fund or a single account.
Sponsors often find the paperwork looks quite different for each structure. Many sponsors talk to a securities attorney about both before making any promises to an institution.
From my book
One point I make to sponsors is that the size of the check changes the conversation. In my experience, big institutions and big multifamily offices often do not have time to diligence every deal, so many of them prefer funds and may write bigger checks to them. I have also seen that once an investor gets above a certain ticket size, they can negotiate fees and ask for customized portfolios and advisory services. That is where a separate account starts to make sense for the investor.
"Most family offices would rather, and families would rather put money in a direct deal than a fund, but big multifamily offices, big institutions, they don't have time to do diligence every deal. They typically do prefer the funds and will write bigger checks to funds."
"While the fund-of-funds name has seen better days, many family offices I know still invest in a few fund-of-funds because they do not have the resources in-house to hire and fire 10 to 15 hedge fund managers. Also, once you get above a $20 million or $30 million size of investment, you can negotiate more on fees and get customized fund-of-fund portfolios and advisory services included."
Facts from this talk
- One sponsor reported separate accounts with pension funds and endowment separate accounts with Brown, Harvard and Yale over 30 years of raising capital.
- Ryan said institutions have been forced through funds because they cannot afford one-off due diligence, and that direct investing is the trend of the last 5 years.
- John said he spent about $100,000 on audited financials, and later added Cayman funds and a monthly NAV from a fund administrator to meet institutional requirements.
Sources
From Richard C. Wilson's Centimillionaire Strategies YouTube channel: Real Estate Investor Success Stories: Hear from 5 real estate investment firms who have raised ov..., Capital Raising Frequently Asked Questions Webinar, How to Build a $1B Real Estate Platform | John Lettera & Richard C. Wilson. Quotes come from the video captions, lightly edited for readability. Figures are the speakers' own estimates and experience.
General education only. Not legal, tax or investment advice.
Talk to a securities attorney to explore options around fund structure options, offering documents and institutional investor agreements. Do not use AI to write your own legal agreements.
Where to start
- Decide whether you are offering a pooled fund, a single investor account, or direct deal-by-deal access.
- Many sponsors talk to a securities attorney about how each structure is set up and documented.
- Get audited financials and a fund administrator in place before you approach institutions.
- Prepare for third party due diligence reviews of your platform.
- Start with smaller or more innovative institutions, since they are often the ones asking for direct access.
Follow-up questions
Do separate accounts always have lower fees?
Not necessarily. Fees depend on what the manager and the institution negotiate. None of the videos I drew on gave fee numbers for separate accounts, so many sponsors talk to their attorney and their investor.
Can a small sponsor offer a separate account?
It is possible, but institutions expect an institutional platform first. John's view was that institutions generally will not invest without one.
Is a direct investment the same as a separate account?
No. In a direct investment the investor puts money into a specific asset or deal and approves it deal by deal. A separate account is a portfolio managed for one investor.
Related questions
- What is an anchor investor in a fund raise?An anchor investor is the first big, highly credible investor who commits to your raise.
- How do I raise capital from a foundation?Start by checking whether your fund is large enough.
- What is the minimum check size for institutional investors?There is no single minimum check size for institutional investors.
- How do I prepare a DDQ for institutional investors?Build one master DDQ before any institution asks for it.
Work through it with the family office fit check. See all institutional investors resources.