What Will It Take to Win in OZ 2.0? From Fund to Franchise

What Will It Take to Win in OZ 2.0? From Fund to Franchise:

Beginning in 2027, Opportunity Zones (“OZ”) will move from being a one-time program to being a recurring part of the US investment landscape. Permanence does more than extend the life of the incentive. It changes the competitive equation.

OZ 1.0 emerged quickly into a demand-first market. Investors had realized gains and a finite period to reinvest them; developers had qualifying projects that needed capital; and Qualified Opportunity Funds (“QOF”) were formed to connect the two. Much of the market consequently competed fund by fund, with three-quarters of QOFs formed around single assets and a similar proportion of fund managers operating a single fund. That orientation made sense. The investment merits of the underlying opportunity came first, and a temporary program provided less reason to invest in capabilities intended to endure across future investment cycles.

Nevertheless, some of the most successful OZ managers began moving beyond that model, carrying experience, investor relationships, and market credibility from one QOF to the next. The defining opportunity of OZ 2.0 is therefore not simply the ability to launch more funds. It is the ability to make each successful fund strengthen the platform for the next one.

Invest for permanence.

Three changes drive the fund to franchise evolution.

First, permanence creates a recurring market. Capabilities built today can now be leveraged across future funds and investment cycles, fundamentally changing the economics of investing in the platform surrounding the fund.

Second, permanence will broaden the competitive field. Existing OZ managers enter 2027 with years of specialized experience that cannot simply be purchased. New institutional entrants bring different advantages: established brands, distribution, infrastructure, and investor relationships. Neither is sufficient by itself. OZ specialists will need to institutionalize without becoming generic; institutional managers will need to specialize without treating OZ as simply another private-markets product.

Third, the operating demands are increasing. OZ remains a relatively young market, and its regulatory framework, technology and market practices are likely to evolve rapidly. The new reporting framework is a good example. Under OZ 1.0, QOF reporting centered primarily on demonstrating the fund’s own compliance, including its annual asset test through Form 8996. New Internal Revenue Code (“IRC”) Sections 6039K and 6039L create a much broader information flow from Qualified Opportunity Zone Businesses (“QOZB”) to QOFs and ultimately to the IRS, including information about underlying businesses, assets, residential activity and employment.  Importantly, this change is already underway: for calendar-year QOFs, the new reporting requirements apply beginning with the 2026 tax year, before the new OZ designations take effect in 2027.

The proposed regulations extend that responsibility further, using the authority Congress provided to require additional information relevant to continuing QOZB qualification, including substantial improvement, working capital safe harbors and cure periods. The result is greater look-through responsibility for the QOF and a growing need for reliable data collection, monitoring, controls and documentation across the underlying portfolio.

Taken together, these changes alter the economics of how an OZ business should be built. Capabilities that were difficult to justify for a temporary program can now create value across successive funds and investment cycles. Managers that instead reconstruct expertise, infrastructure, and distribution around each new QOF repeatedly incur costs and effort that competitors are able to reuse, improve and compound.

That is why building an OZ franchise matters in OZ 2.0. It is not about having more funds. It is about creating capabilities that make each successive fund easier to raise, better to operate and more valuable to the franchise that follows.

Real estate private equity provides a useful parallel. Investment sponsors have evolved from raising capital deal by deal, to programmatic investment relationships, and ultimately institutional fund-management platforms.  The underlying property never stopped mattering. What changed was that the sponsor itself increasingly became part of what investors were underwriting.

Opportunity Zones may be entering a similar stage. Investors will still need to conclude that the underlying investment is attractive. But as managers establish track records across multiple investment cycles, the ability to source opportunities, manage OZ-specific complexity and provide a consistent investor experience will make the manager increasingly important to the investment decision.

Build an enduring franchise.

An OZ franchise is not defined by the number or structure of its QOFs, but by the ability to leverage the capabilities built around one offering across those that follow.  A successful investment manager carries more than a track record from one fund to the next. Investor relationships, institutional knowledge and operating capabilities accumulate rather than being rebuilt for each offering. The result is a compounding effect: each fund should leave the franchise better positioned to raise, launch and operate the one that follows.

That leverage also needs to extend to the manager’s market position. In OZ 1.0, simply possessing specialized knowledge of a new and complicated program could be differentiating. In OZ 2.0, specialized knowledge alone will no longer be enough.  A franchise needs to turn experience into a recognizable investment proposition and a track record that investors and intermediaries value. The underlying investment must still stand on its own merits, but over time the manager itself should become part of the reason investors choose the next fund.

Investor experience is another capability that compounds. It may support today’s fund, but its greater franchise value is the confidence it builds in the manager. The objective is not simply to have an investor conclude, “This is a good investment,” but eventually, “This is a manager I want to invest with again.”

Build capabilities, not just processes.

A process solves for the needs of today’s fund. A capability creates something the manager can reuse, improve and scale across those that follow. The objective is an operating architecture that can be reused across offerings without becoming rigid. In a market as young as OZ, where regulations and market practices will inevitably continue to evolve, adaptability is itself an important franchise capability.

That does not mean building everything internally. OZ specialists need institutional capabilities without recreating the infrastructure of a large asset manager or sacrificing their specialized expertise and agility. Institutional entrants face the opposite challenge: determining where their existing infrastructure works and where OZ-specific capabilities need to be added.

This makes partner selection part of franchise building. The right partners should do more than service today’s fund. They should extend the manager’s capabilities, bring specialized expertise where needed, and have the scale and flexibility to evolve with the franchise as OZ itself evolves.

Turn required information into an advantage.

OZ 2.0 will require managers to collect significantly more information from their underlying QOZBs. Every QOF will have to comply. The opportunity for differentiation will be what they do with the information once they have it.

The opportunity is to move from compliance and transparency to insight. Compliance demonstrates that requirements have been met. Transparency gives investors and other stakeholders greater visibility into what is happening across the portfolio. Insight allows the manager to use information accumulated across all funds and investments to improve decisions, identify issues earlier, and demonstrate both investment performance and what the capital is accomplishing.

In a program explicitly designed to direct investment into underserved communities, that last point matters. As OZ becomes permanent, the ability to credibly demonstrate outcomes may increasingly influence investor decisions and the broader reputation of the manager. It may also contribute to the broader evidence policymakers use to evaluate whether the program is accomplishing its intended purpose.

Managers that treat expanded reporting as an information capability rather than simply a new compliance burden will build an asset that becomes more valuable as the franchise grows.

Build a market around the franchise.

Winning in OZ 2.0 will also require managers to think beyond the individual investor. Attorneys, accountants, and other intermediaries often influence whether capital ultimately reaches a QOF. In a permanent program, those relationships can span multiple funds and investment cycles.

That changes the value of the ecosystem. Managers that engage intermediaries only when raising a fund must repeatedly rebuild distribution. Managers that establish trusted OZ franchises can build intermediary relationships that persist across offerings, turning distribution from something reconstructed for each fund into another capability.

A successful fund should add more than AUM. It should strengthen the manager’s track record, relationships, and operating capabilities.   The question managers should be asking as they prepare for OZ 2.0 is simple: “What are we building today that will make the next fund better?”

JTC does not provide legal, tax or investment or other professional advice and, while it may review and report upon such advice received, JTC does not give, accept or endorse and should not be understood to be giving, accepting or endorsing such advice.