Bonaventure executive argues the industry’s focus on returns over capital preservation is putting investor money at risk.
The real estate investment industry needs to shift its focus from chasing yields to protecting investor capital, according to Mike Auerbach, Chief Growth Officer at Bonaventure. “We all romanticize about the upside, but what we’re really trying to do is limit downside risk and preserve capital. And I don’t think a lot of people really lead with that,” Auerbach says.
According to Auerbach, the competitive nature of the investment business often leads sponsors to emphasize potential returns over risk management. “In competitive situations, there are groups with higher yields that seem like better deals,” he explains. “But ultimately, that’s where you get in trouble if one lever goes down, because they haven’t really assessed the risks of the deal.”
This focus on yields has become particularly problematic in recent years, Auerbach argues. “You’re really starting to see the fallout from a sponsor perspective, of buying bad deals in ’21 and ’22 and now their investors have suffered,” he notes.
Auerbach advocates for a fundamental shift in how investment opportunities are evaluated and presented to investors. “Being able to create a repeatable, scalable product that preserves capital is of utmost importance, because it takes a lot of people a lot of time to build up that capital,” he says.
This approach requires sponsors to potentially sacrifice short-term growth for long-term stability. “As stewards of that capital, we are responsible for it,” Auerbach explains. “That’s why the amount of our own capital invested alongside our partners should give someone the opportunity to sleep better at night, versus someone that only gives a 2-3% allocation in their deals.”
The current market environment makes this focus on capital preservation particularly relevant, according to Auerbach. While he sees opportunities emerging, he emphasizes the importance of careful risk assessment.
“I think right now is really one of the best opportunities to strike before the herd mentality kicks in,” he says. “But you never want to be that group or in that market that catches the falling knife, and it’s kind of hard with everything that’s going on – interest rates, political headwinds.”
For Auerbach, the key to long-term success in real estate investment lies in maintaining this disciplined approach to risk management, even when it means passing on potentially lucrative opportunities.
“I want the majority of sponsors in the space to continue to do well and have stamina,” he says. “How do you continue to have that stamina? It’s by doing the right thing and looking out for people’s interests, which isn’t always easy when there’s competition.”
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