Accredited investors have long been attracted to private funds for a host of reasons. The low correlation of most private funds to the public markets offers investors portfolio diversification benefits they might not otherwise have. 

The private investment universe provides a much larger opportunity set as well, There are over 95,000 private global companies globally with annual revenues of more than $100 million compared to roughly 10,000 public companies with similar revenues.¹ And the potential for superior return due to what many refer to as the illiquidity premium can motivate investors as well.

But not everything about private funds is appealing to investors. Common concerns that often turn investors away include:

Unwrapping the Private Fund Fee Structure

Private investment funds, including hedge funds and private equity funds, typically adopt a fee structure known as "2 and 20," which has been a standard in the industry for many years. 

The first component of this fee structure is the management fee, generally set at around 2% of the total assets under management (AUM). This fee is charged by the fund manager for the operational costs of running the fund, including salaries, research, office expenses, and other administrative costs. It is charged regardless of the fund's performance and provides a steady income stream for the fund manager.

The second component is the performance fee, often set at 20% of the fund's profits. This aligns the interests of the fund manager with those of the investors, as the manager's significant income comes from the fund's successful performance. The performance fee is typically subject to a "hurdle rate" or a "high-water mark," ensuring that managers are rewarded for genuine investment skill rather than market luck.

Investor Concerns

Despite its widespread use, this fee structure has been criticized for its lack of transparency and potential misalignment of interests. The 2% management fee, for example, can be substantial, especially for large funds, and is often viewed as excessive, particularly in years when the fund's performance is poor. Additionally, the 20% performance fee can encourage fund managers to take undue risks to achieve higher returns, which may not always align with the risk appetite and interest of the investors.

Investors have expressed frustration over the non-transparent nature of these fees. There is often a lack of clarity about what expenses are covered by the management fee, and the calculation of performance fees can be complex and not always straightforward. This opacity can lead to a situation where investors are not fully aware of the costs they are bearing, which can eat into their returns.

A Better Alternative 

Fortunately, not every private fund is structured the same as what we have described above. A private credit real estate fund, in fact, is evidence that private funds can be developed and priced in a manner that better aligns with investor interests.

Ranked by Forbes as one of the industry’s top hard money lenders², Park Place Finance recently introduced a private credit fund that is drawing increased interest among accredited investors for its simple pricing structure and transparency. The Park Place Real Estate Fund is a short-term private lending fund that focuses solely on lending to single-family housing developers and investors. Designed for capital preservation and consistent yield, the fund offers several potential advantages of owning real estate debt including higher yields, portfolio diversification, and a low correlation with traditional asset classes. 

Simple and Straightforward: The Park Place Real Estate Fund

A quick look at how the Fund works helps illustrate its transparent and consistent approach to investing and managing the portfolio. Attributes include: 

The Fund operates similarly to a bank, providing capital to real estate investors, developers, and builders. It earns interest on the loans and, after covering operating expenses, distributes income to investors.

Borrower Payment Structure

• Borrowers pay monthly
• Third-party loan servicing

Fund Payout Structure

• The Fund pays operating expenses
• Investors earn monthly distributions (10% annualized rate of return)
• Investments backed by tangible assets
• Park Place Finance earns profit after investors are paid

Distributions

Distributions occur on a monthly basis. Since borrowers make interest payments monthly, the Fund is able to distribute investor earnings on the same schedule. Earnings can be received via direct deposit (ACH) to your bank account.

Reinvestment Option: 

If you're looking for a growth strategy for your investment, you can choose to automatically reinvest your dividends directly back into the Fund and earn compound interest.

Exit or Redemption Process

While the Fund is perpetual, each investment carries a 36-month commitment period. After this period, you may withdraw your funds with 90 days' notice, subject to fund liquidity.

Conclusion

We hope this discussion has been informative in helping you recognize the potential benefits of investing in private funds, certain limitations and investor concerns about private fund structures, and an introduction to a more investor-friendly approach to private ownership.

¹ https://russellinvestments.com/us/blog/why-private-markets-investments  

² https://www.forbes.com/advisor/mortgages/real-estate/best-hard-money-lenders/