Look closely at governance when assessing private assets

Equiton explains why a strong governance structure is a key priority, emphasizing its role as a performance driver for the company, even as a private entity

Look closely at governance when assessing private assets

This article was produced in partnership with Equiton.

Governance can be taken for granted among investors and advisors who focus on publicly listed securities. These securities are subject to significant oversight and mandated transparency around their governance structures. The rise of private Real Estate Investment Trust (REIT) investing, however, has created a somewhat foggier landscape that advisors and investors must now navigate.

REITs in general, and private REITs in particular, boast a number of attractive qualities that investors and advisors are seeking these days. They offer real estate exposure, which can hedge against public market volatility, while adding diversification, tax efficiency, and cashflow to investor portfolios. Public REITs are subject to slightly higher volatility but come with strict oversight and governance rules. Private REITs are not held to the same standards but can offer higher returns due to the agility of their management and their ability to surgically access assets.

Geoff Lang believes that when advisors and investors assess the prospects for a private REIT, they should ask themselves how that REIT is governed. Lang is the Senior Vice President, Business Development at Equiton, a private equity real estate firm. While standard criteria like risk-return profile should be applied, Lang emphasizes the importance of governance in private REITs, especially as it impacts their capacity to protect capital.

“There are a lot of different investments in the marketplace, a lot of thematic plays that look really good right now, but everyone has their day in the sun,” Lang says. “The question is, what happens when they have their day in the shade? Corporate governance can make the difference in moments like that, to protect a company and ensure its investors’ interests and capital are preserved as best as possible.”

What rules (don’t) apply to private REITs?

Private REITs are not typically held to the same standards of governance or reporting as a publicly listed REIT. According to the Ontario Securities Commission — which mirrors other provincial regulators — publicly traded REITs must be offered under a prospectus, which clearly outlines the governance and structure of the trust. Publicly traded REITs are also priced on a daily basis and are subject to stringent disclosure obligations, giving investors greater transparency.

Private REITs operate under prospectus exemptions and are not forced to meet the same standards. Therefore, they are often viewed as being less transparent than their public counterparts. The returns and diversification that private REITs can offer, however, make them into a broadly attractive asset class for investors. Choosing the right private REIT is key.

“Even though we’re private, we adhere to high standards of governance, giving investors the clarity and confidence they deserve,” says Lang.

How to assess governance quality

Lang explained how advisors and investors can assess the quality of a private company’s governance. Having a majority independent board is key as they can provide a degree of perspective informed by experience that helps senior management make good decisions.

A publication of audited financial statements is crucial as well, Lang says. So is a range of regular assessments by third-party firms. He explains that Equiton employs all these practices in their own governance.

Equiton publishes their audited financial statements on their website. They are a member of the Global Real Estate Sustainability Benchmark (GRESB) and voluntarily submits assessments of their portfolio. They maintain an ESG committee, applying ESG principles to their management. They take an approach to governance that far exceeds what is required of a private investment firm, but one that they think sets them apart.

Equiton makes a point of responding to investor and advisor queries about their governance structures and financial statements quickly and comprehensively. They maintain a level of transparency and accessibility that Lang believes should be a key factor when investors and advisors are working to assess the quality of governance at a private firm.  

Lang explains how advisors and investors should also look at the experience of senior management.

“Understand if the leadership has been in this space for a long period of time, look at their past jobs,” Lang says. “Determine how easy it is to access their financial statements, how easy it is to talk to someone from the company. These are all such important factors.”

How governance relates to returns

From a returns standpoint, Lang thinks strong governance is a crucial foundation to a firm’s ability to generate consistent long-term returns. Perhaps more importantly, though, he says that governance can help ensure protection of capital.

“Our senior leaders had the foresight to mandate 10-year fixed mortgages,” said Lang. “This approach safeguards against volatility and high-interest rate environment.”

By maintaining a structure that prioritizes the needs of investors and focuses on sustainable long-term business practices, Equiton can protect against some key elements of downside risk.   

Fundamentally, the firm is built on strong governance because they believe it will help their investors receive the returns, the capital protection, and the information that they need to navigate today’s economic climate. As advisors and investors work together to assess private asset opportunities, governance should be front of mind.