Equity Under Management (EUM)

Equity Under Management refers to the total amount of Equity purchased by the end-user investors out of the currently active investment vehicles by a real estate syndication.

What is Equity Under Management (EUM)? 

Equity Under Management (EUM) refers to the total amount of equity that investors have invested in a particular investment vehicle managed by a real estate syndication. This metric is used to track the amount of capital that the sponsor has available to invest in the property. It also determines each investor's percentage ownership in the investment vehicle. 

What is the significance of Equity Under Management in real estate syndication?‍

Let's check out why EUM is significant in real estate syndication:

• Investment Decisions: The EUM represents the total amount of money available for investment, and as such, it drives the investment decisions of the sponsor. The sponsor will use the EUM to determine which properties to invest in, and how much capital to allocate to each property.

• Risk Management: Managing the EUM is a critical aspect of risk management in real estate syndication. If the sponsor takes on too much capital, they may not be able to deploy it effectively, leading to poor returns. Conversely, if the sponsor doesn't raise enough capital, they may not be able to acquire the desired properties, or may not be able to adequately diversify the investment vehicle.

• Investor Relations: The EUM is a key metric that investors will focus on when evaluating a real estate syndication. Investors want to know that the sponsor has raised enough capital to execute the investment strategy effectively, while avoiding oversubscription. If the EUM is too low, investors may be concerned that the sponsor won't be able to achieve the investment objectives.

• Cash Flow: The EUM determines the percentage ownership of each investor in the investment vehicle, which in turn drives the cash flow distribution to investors. As the investment vehicle generates cash flow, each investor will receive a portion of that cash flow based on their percentage ownership in the EUM.

‍How is Equity Under Management different from Assets Under Management (AUM)?‍

Equity Under Management (EUM) and Assets Under Management (AUM) are two key metrics used in the financial industry, including real estate syndication. While both metrics relate to the total value of assets managed by a financial professional or firm, there are some key differences between them.

AUM refers to the total value of assets managed by a financial professional or firm, including all types of assets such as stocks, bonds, and real estate. AUM is a widely used metric to evaluate the performance of investment firms, and it includes both equity and debt investments.

On the other hand, EUM refers specifically to the total amount of equity invested by investors in a particular investment vehicle managed by a sponsor. In real estate syndication, this refers to the total amount of equity raised by a sponsor from investors for a particular investment opportunity, such as a property or a fund.

To illustrate the difference between AUM and EUM, let's consider an example. Imagine that a real estate investment firm manages $1 billion in assets, of which $500 million is invested in equities (i.e. stocks) and $500 million in real estate. If the firm creates a new investment vehicle for a particular real estate opportunity and raises $100 million in equity from investors for that vehicle, the EUM for that investment would be $100 million. 

However, the AUM for the firm would still be $1 billion, since it includes both equity and debt investments across all of the firm's managed assets.

How is Equity Under Management calculated?

Equity Under Management (EUM) is calculated by adding up the total amount of equity invested by investors in a particular investment vehicle managed by a sponsor. The formula for calculating EUM is as follows:

EUM = Total amount of equity invested by investors

Let's take an example to understand this better. Suppose a sponsor creates a real estate investment fund with a target equity raise of $50 million. The sponsor raises $20 million from investors for this fund. The sponsor also creates another investment opportunity, a property, and raises $5 million from investors for that opportunity. 

The total equity raised by the sponsor for both these investments would be $25 million. Thus, the EUM for this sponsor would be $25 million.

Can Equity Under Management increase or decrease over time?

Another factor that can impact EUM is the sponsor's ability to identify and secure new investment opportunities. If the sponsor is successful in identifying and securing new investment opportunities, they may be able to raise additional capital and increase the EUM. Conversely, if the sponsor is not successful in finding new investment opportunities, the EUM may remain stagnant or even decrease if investors choose to withdraw their capital.

Market conditions can also impact EUM. For example, if there is a downturn in the real estate market, investors may be less likely to invest in new opportunities, which could lead to a decrease in the EUM. Alternatively, if there is strong demand for real estate investments, investors may be more willing to invest, leading to an increase in the EUM.

Conclusion 

Equity Under Management (EUM) is an important metric for investors when evaluating a sponsor in real estate syndication. This is because EUM can provide insight into the sponsor's ability to raise capital and execute their investment strategy effectively.

Investors want to know that the sponsor has raised enough capital to execute the investment strategy effectively, while avoiding oversubscription. If the EUM is too low, investors may be concerned that the sponsor won't be able to achieve the investment objectives. Conversely, if the EUM is too high, investors may be concerned that the sponsor will have difficulty finding suitable investment opportunities or that the investment vehicle is too risky.

In addition, EUM can also impact the cash flow distribution to investors. The EUM determines the percentage ownership of each investor in the investment vehicle, which in turn drives the cash flow distribution to investors. As the investment vehicle generates cash flow, each investor will receive a portion of that cash flow based on their percentage ownership in the EUM. Therefore, a higher EUM could potentially lead to higher cash flow distributions for investors.