Opportunity Funds Listing Shows Strong Increase in Investment

Published by Michael J. Novogradac on Wednesday, January 8, 2020 - 12:00AM

Investment in qualified opportunity funds (QOFs) continues to grow–and the pace appears to be picking up.

Funds that invest in opportunity zones (OZs) report having raised more than $6.7 billion according to the latest update of the Novogradac Opportunity Funds Listing. That is an increase of more than 50 percent from the total ($4.46 billion) reported one month ago.

During the past month, the number of QOFs on the listing grew from 366 to 502 and the number of QOFs reporting having raised equity increased from 184 to 292–and the 292 QOFs that have reported having raised equity have an average raise of $23 million. Fourteen QOFs on the Novogradac list have raised at least $100 million.

Significantly, the Treasury Department released final regulations for OZs in December, a landmark moment for the tax incentive that was part of the tax-reform legislation in late 2017.

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This is the continuation of a steady growth in the number of QOFs on the Novogradac listing and the amount they report having raised–going from 28 funds having raised $790 million last May to this month’s figures.

The information for the rolling survey comes from QOFs voluntarily providing information or from other public sources, including press releases. The Novogradac list doesn’t include proprietary or private funds owned and managed by their principal investors.

Of course, the total funds raised by QOFs is undoubtedly higher than the reported $6.72 billion, because the Opportunity Funds Listing is a voluntary rolling survey and many of the QOFs being tracked haven’t revealed their fundraising levels to Novogradac. In addition, there are QOFs that are not part of the survey and there are private QOFs formed by high-net-worth individuals, corporations and others. It’s reasonable to estimate that the actual dollars raised to date are double or triple $6.72 billion.

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Residential, Commercial Still Lead Way

Among the QOFs on the Novogradac listing, those with at least a partial focus on residential and commercial investment continue to lead the way, although operating businesses are beginning to gain steam.

QOFs with at least a partial focus on residential development have raised $4.63 billion, or 68.9 percent of the total. Those with at least a partial focus on commercial investment have raised $4.47 billion, or 66.4 percent of the total. The fact that 54 percent of the QOFs in Novogradac’s listing have multiple investment types or unknown investment types means that there is substantial crossover, with many QOFs including both residential and commercial investment.

According to the latest data, QOFs with a focus on operating businesses have raised about $266 million (or 4.0 percent of the total funds raised) and those with operating businesses as their sole focus have raised $128 million. Both the totals raised and the percentage of the total continue to rise for operating businesses, going from 2.6 percent of the total raised in October to 3.2 percent in December to 4.0 percent this month.

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Single-City Focus

The geographic focus of QOFs continues to be broad. Of the 193 QOFs that report their geographic focus, 47.7 percent have a single-city focus. That is mitigated by the fact that more than half of those QOFs say they have a single-asset focus. In other words, they are focused on a single city because they were formed to provide financing for a specific business.

Nearly 20 percent of QOFs have a national focus and 14.5 have a regional focus. The rest have a single-state, multiple-state or multiple-city focus.

Maturing Incentive

The increasing investment in QOFs is more evidence that the OZ incentive is maturing.

As indicated earlier, since Novogradac began tracking these funds in May, the number of QOFs reporting equity raised has increased by a factor of three and the amount reported raised has gone from $790 million to $6.72 billion.

With Treasury’s final regulations scheduled to be published Monday in the Federal Register–and the expectation that they will go into effect after March 13–investors are more comfortable with the two-year-old incentive.

At least that’s what the numbers indicate.

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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