Biggest QOFs Raise Most Equity, but Smaller QOFs Continue to Make Local Impact

Published by John Sciarretti on Wednesday, August 2, 2023 - 12:00AM

Data compiled by Novogradac through June 30 displays a continued trend for the opportunity zones (OZ) incentive: Qualified opportunity funds (QOFs) that have raised less than $10 million are the most active, but most equity continues to be raised by QOFs that have raised more than $100 million.

Those data points highlight the flexibility of the incentive, which allows local partners to raise equity for specific properties, while also providing large organizations an opportunity for broader investment in lower-income communities.

As of June 30, QOFs tracked by Novogradac reported raising a cumulative $36.10 billion in equity, including $2.01 billion since Dec. 31, 2022. Novogradac is tracking 1,731 QOFs, of which 1,330 report a specific amount of equity raised.

QOFs are the investment vehicle created at the end of 2017 through which taxpayers invest capital gains to qualify for deferral and other tax benefits. Novogradac collects data on a rolling basis from QOFs that voluntarily provide information. Novogradac also uses information from public sources such as Security and Exchange Commission filings and press releases. The figures don’t include proprietary or private funds owned and operated by their principal investors, so actual OZ investment is greater than the Novogradac total, probably by a figure of three or four times.

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Of the QOFs tracked by Novogradac through June 30, 11 (0.8%) raised $500 million or more in equity–but that small subset of QOFs raised 26.0% of all equity reported by QOFs. Three QOFs joined the list of so-called Super QOFs (those raising $500 million or more) since the end of 2022, bumping the overall equity raised by that group from 22.2% of the total.

Combined with 59 other QOFs that report having raised $100 million to $499 million, the 70 largest QOFs in Novogradac’s survey combine to make up just 5.3% of all QOFs that report a specific equity amount, but they have raised 61% of all funding. That percentage is virtually unchanged since December.

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While most equity is raised by the large QOFs, the OZ incentive is most often used by smaller QOFs on single projects. Of the QOFs tracked by Novogradac that report a specific equity raise amount, nearly two-thirds (64.9%) have raised less than $10 million. While they make up the majority of QOFs, they have raised just for 6.6% of the total equity reported.

Further insight into the smaller QOFs comes from a look at the general geographic target of funds. Among those QOFs for which the information is known, 733 (76.8%) focus on one city and all but 48 of those QOFs are focused on a single asset, meaning they are developing one project in an OZ.

The split of QOFs between the large, multi-asset, multi-city funds and the small, single-asset, single-city funds is highlighted by the median equity raised. The median amount of equity raised by a single-asset QOF is $3.7 million and the median for a multi-asset QOF is $26 million.

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Novogradac also documents QOF managers by amount of equity they oversee. There are 14 QOF managers who oversee $500 million or more in equity and 63 who oversee $100 million or more. The managers who oversee at least $100 million in QOF equity combine to manage 76.0% of all equity raised.

Over the past six months, three QOF managers joined the $500 million-plus club, and one joined the $100 million-plus club (all three of the QOF managers who moved past $500 million were already in the $100 million grouping).

Most QOF managers oversee just one fund, but those QOFs tend to be small: While roughly a quarter (25.2%) of QOF managers oversee multiple funds, those managers oversee 95.5% of all equity raised by QOFs.

A breakdown by median amounts is helpful: The median amount raised by single-fund managers who have raised equity is $2.9 million, while the median amount raised by multi-fund managers is $20.6 million. Combining all managers, the median amount raised by QOF managers who have raised equity as of June 30 was $5.0 million, unchanged since the end of 2022.

There are 298 QOFs that have closed, meaning they have raised their targeted equity amount and are no longer seeking investment. Those QOFs raised $13.37 billion and the median amount of equity raised by those funds was $9.5 million.

The information contained in this blog post is for informational purposes only and does not constitute an offer to sell or solicitation of an offer to buy securities. Novogradac does not provide investment advice and the information in this report is not to be construed as a recommendation to engage in any specific transaction. Readers are urged to consult with their own professional advisors if they are considering investing in a QOF.

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