How the founder of the Carlyle Group ($382BB AUM) evaluates Real Estate Funds

Updated: November 7, 2023

Private equity titan David Rubenstein, co-founder and co-chairman of The Carlyle Group, has shared his 10-step approach to conducting due diligence on real estate investment funds. Rubenstein knows what he's talking about -- Carlyle Group manages Carlyle is one of the world's largest and most diversified global investment firms, with approximately $382 billion of assets under management and is known as one of the savviest operators in the financial world.

These 10 points align with Reliant Real Estate's approach to making money for investors in self-storage.

Below is an overview of Rubenstein's Top 10 list and how Reliant's performs on each point.

1. Look at the track record.

"Look at the track record. That's the best indicator of future performance … although not perfect."

Past performance, while not 100% predictive of the future, is the best indicator of future performance. Of course, the past is not a perfect indicator because no one can accurately predict the future. But track record remains the most telling indicator of future performance.

Reliant boasts a fantastic track record:

• We've sold 38 properties.
• We've never lost investor principle.
• We've never lost a property to the bank.
• Our average project-level internal rate of return is 33% with a hold time of just over three and a half years.

In other words, we've had a really good run to date.

2. Check that the impressive results were achieved by people still at the fund.

"Was the track record achieved by people still in the organization? Sometimes [firms] have great track records and the people who achieved it have left."

Sometimes firms tout impressive track records - but they fail to mention that the people who have achieved those stellar results have left. Successful performers often leave to start their own firms. That is not the case here at Reliant. Our average tenure of our senior management team is over 5 years, and we are blessed to have a great team. Everybody is rowing in the same direction. We all understand what direction we're going and every key component in the business is working towards that.

3. Have the fund managers invested their own money in it?

"Have the people investing the fund put a lot of their own money into it?"

Every investor poses this question. Do we have skin in the game? Are we aligned with the investors? And the answer to that with Reliant and specifically our most recent fund is Yes, we have contributed over $3,000,000 in Reliant Self-Storage Fund III.

But more importantly, at Reliant, when you talk about skin in the game, we sign for recourse debt. If you're not familiar with the concept, what that means is there are some lenders that require personal guarantees. In our world, we do a lot of construction, a lot of value add. Generally, the lender wants some sort of personal guarantee from the principals to back up that loan to make sure construction is completed. We sign those recourse notes personally. It's nice that we have cash in the deal, but more importantly, our personal assets are on the line. For me, that's the piece that I think is the real skin in the game. With a personal guarantee, if we don't perform, the lender comes and takes our personal assets away from us! That's real skin in the game.

4. Do younger workers share in the gains and losses?

"Are the younger people doing the legwork, are they going to get an economic stake … are they going to have some carried interest in it?"

The follow-up to No. 3 focuses on everyone else in the organization: Are front-line workers - researchers, analysts, and others -- going to get an economic stake and receive some sort of carried interest? Is everyone in the firm incentivized to drive results? The answer here at Reliant is Yes. We have an incentive plan for our employees. They are participating in some of the ownership stakes of the properties once they've hit a certain tenure at the company. The idea is to make sure the incentives of the investor and the incentives of the the sponsor are aligned.

5. Does the fund have a strong reputation?

"Does the organization have a reputation for good ethics: in other words, are they being sued for fraud or things like that?"

Civil suits and regulatory actions can be the smoke that reveals a hidden fire. Of course, litigation doesn't always mean the fund is unethical. If you're in this business long enough, you're bound to be on the wrong end of a lawsuit. We encourage all of our investors to do their due diligence on us and our background. We don't have any litigation in regards to fraud or Securities and Exchange Commission violations. We're really proud of our squeaky-clean track record.

6. Who's invested in the fund?

"Look at who the other investors are; smart money knows how to find good deals, and it's very rare to find a great fund where nobody you've ever heard of is investing in it. Generally, people who know how to look at funds are going to find the best funds."

Most of our investors are individual investors -- accredited, high net worth individuals who are looking for alternative investments in real estate. We also have on our roster two smart money investors. One is Harrison Street Capital, a private equity shop that runs $40 billion in capital. Harrison Street has been a partner of Reliant's since 2016. We bought 20 properties with them in 2016 and have had successful exits with each. They have an equity stake in 10 of the 30 properties in our current fund, so they have continued partner with us.

The second smart-money partner we have is a family office associated with the owner of the NFL's Buffalo Bills and the NHL's Buffalo Sabres. They've been a partner of ours for more than a decade, and we've had a great relationship.

7. Does the fund keep employees?

"Look at the organization's ability to keep people. If … people are always leaving, that's an important indicator."

High turnover is a red flag that the organization has shortcomings. Our turnover rate is very, very low at the site level where people are managing our individual properties. Back to our average tenure in question No. 3, Reliant can point to stability in its leadership ranks and among its front-line workers.

8. Did the fund build its track record in a way that's still meaningful?

"Whether or not the organization has made its track record in an area that's still relevant in the future … Because maybe somebody was good at investing in buggy whips, then the automobile comes along and being an expert in buggy whips is probably not such a great thing."

As Rubenstein noted, maybe a manager thrived by investing in a technology or sector that's now obsolete. The pertinent question in terms of Reliant: Is self storage still going to be relevant in the future? Americans are probably not going to become minimalists all of a sudden. There may be a generational shift at some point in the future, but today, Americans like to buy stuff. As people buy stuff, they need a place to put it in. Historically that has been proven out. And so self storage we think is a very viable asset class.

As of July 2022, the U.S. economy is headed into or is already in a recessionary period. Generally, self storage performs very, very well during recessionary environments. We expect that to happen again in this next economic cycle.

9. Can you get prompt answers to your questions of the manager?

"Next I would say - probably most importantly - whether you can get information from that organization on a timely bases when you need [it]."

This is something that investors always ask us about: How do you communicate with your investors? We have an internal investor relations team here at Reliant. We're always a phone call or email away. We try to respond to everybody in a 24-hour window. If we don't know the answer, we'll respond and tell you we're working on it. You can always schedule a call with our team. We send out quarterly reports with our quarterly distributions that update you on your particular investment.

But the thing we like to say is that when you write a check to Reliant as an investor, you have the ability to be one person away from your money. If you want to talk to Todd Allen, our managing principal, you might not be able to reach him every single day. But he's on a bunch of our webinars and you have insight to him and what he's thinking. Communication is a critical component, especially when things are not going well. Real estate is a cyclical market, and ups and downs are part of the business - and we want to keep the lines of communication open at all times.

10. Is organization's focus is on you, the investor? Are they more worried about you than themselves?

"Whether you feel that the organization's focus is on you, an investor more than they, the organization. You have to make sure that … they have a fiduciary mindset and that they are more worried about your outcome than their outcome."

You need to understand that Reliant's incentives are aligned with yours as an investor. More importantly, we understand that we can't do what we do every day without you as an investor. We have 1,800 investors on our platform. The fiduciary responsibility we take very seriously is to make sure to protect your principle first, not lose your capital.

So there it is. A private equity legend put forth a 10-point checklist for doing due diligence into an investment, and Reliant Real Estate checks all 10 boxes.