Introduction
The largest real estate investors increasingly do not want to be one of dozens of limited partners in a blind-pool fund, surrendering control over strategy and paying full freight on fees. Instead they negotiate a separate account, a dedicated mandate in which a manager invests their capital alone, on terms they set. For a pension, sovereign, or large insurer writing a check of several hundred million dollars or more, the separate account is the way to access a manager's expertise while keeping control over the mandate, the economics, and the assets themselves. It is the customized alternative to the commingled fund, and capital has been migrating toward it.
What a Separate Account Is
A separate account, also called a separately managed account or SMA, is a single-investor vehicle governed by a customized investment management agreement rather than a standard fund document. One limited partner, typically a pension, sovereign wealth fund, large insurance general account, or major family office, commits the capital, and the manager invests it under a bespoke mandate with a dedicated team and tailored reporting.
- Separate account (SMA)
A dedicated investment mandate in which a manager invests a single investor's capital under a customized investment management agreement, rather than pooling it with other investors in a commingled fund. The investor sets the strategy parameters, fee terms, and consent rights, and often owns the underlying assets directly in a structure known as a fund-of-one.
Institutional separate accounts typically range from around $100 million to $3 billion or more. A central design question is discretion: whether the manager can invest freely within the mandate or must seek the investor's consent on each deal. Above roughly $250 million, full-discretion agreements are the norm because deal pace demands it, while smaller accounts more often use deal-by-deal consent.
Why the Largest Investors Prefer Them
The separate account exists because scale buys leverage, and the largest allocators use that leverage to extract terms a commingled fund could never offer them.
| Feature | Separate account (SMA) | Commingled fund |
|---|---|---|
| Investors | One (single LP) | Many, pooled |
| Governing document | Customized agreement | Standardized fund terms |
| Control | High, over mandate and consents | Low, as a passive LP |
| Fees | Often 50 to 100 bps below the flagship | Standard fund rate |
| Asset ownership | Frequently direct, as a fund-of-one | Indirect, through the fund |
The advantages cluster around control, cost, and access:
- Lower fees. Separate account economics almost always beat commingled terms, with management fees frequently 50 to 100 basis points below the manager's flagship fund rate.
- Control and customization. The investor shapes the strategy, sets reporting requirements, holds consent rights, and can credibly threaten to move the mandate if service slips.
- Priority deal flow. A large separate-account client often gets first call on new deals and priority access to co-investment, ahead of the manager's commingled investors.
- Direct ownership and transparency. In a fund-of-one, the investor owns the assets directly and sees straight through to the underlying property rather than a blended fund position.
The Trade-Offs and the Banker Angle
Separate accounts are not free of drawbacks. They demand enough scale to justify a dedicated team, so they are available only to large investors; a single mandate is less diversified than a position across several funds; and they require the investor to have the sophistication to negotiate and oversee the relationship. For these reasons the commingled fund remains the right structure for most investors, and the closed-end and open-end funds still hold the bulk of institutional capital.
The rise of the separate account reinforces the sell-side reality of the business. The investors funding these mandates are the same large institutions that buy directly and rarely hire buy-side advisors, so the separate account is one more reason the deepest pools of capital are reached by marketing assets to them, not by representing them. Understanding the structure is essential to understanding how the largest investors actually deploy, and increasingly the answer is through a mandate they control rather than a fund they merely join.
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