The greatest improvements in fundraising have been confined to North American strategies. But Asia could be next in line, writes Andrew Moylan
In the first three quarters of 2013 there were 115 private-equity real estate funds holding final closes, raising in the process a total of $47bn (€34bn). This was a 24% increase on the same period in 2012, when 136 funds raised an aggregate $38bn.
There have been a number of notable fund-raising successes in 2013, with the $4.4bn Brookfield Strategic Real Estate Partners, $4.2bn Starwood Distressed Opportunity Fund IX and the $3.5bn Blackstone Real Estate Debt Strategies II all holding final closes this year.
There are some clear winners emerging in the fundraising market. Of managers to close funds in the first three quarters of 2013, 43% did above their fundraising target, compared with 35% in 2012. There are also signs that a growing proportion of the capital being raised is by a handful of the largest firms. The 10 largest funds to close in 2013 to date have accounted for 55% of the total raised, while the comparable figure for 2012 was 37%.
In terms of geographic focus, a growing proportion of capital being raised is by funds primarily focused on North America. The proportion of the global total accounted for by North America-focused funds has increased from 52% in 2009, to 63% in 2011 and 78% in the first three quarters of 2013.
While North America-focused fundraising has been strong in 2013, the capital-raising market for Europe-focused funds has been slower, with just $5bn raised by funds holding final closes this year, compared with $11bn in 2012, and $14bn in 2011.
Similarly, Asia-focused fundraising has been slow in 2013, with $4bn raised so far this year, compared with $8bn in 2012. However, a number of large Asia-focused offerings have been brought to market this year, with Blackstone Group, Aetos Capital Asia, Invesco Real Estate and Carlyle Group all launching Asia-focused funds. In total, $11bn is targeted by the 22 Asia-focused funds that have hit the fundraising trail in 2013. This indicates many fund managers are confident that there is investor appetite for exposure to Asian real estate and therefore the potential to raise large funds focused on the region.
There are signs of increased investor appetite for private real estate. Preqin’s latest study of more than 140 investors in private real estate found that 30% expected to commit more capital to private real estate funds in the coming year than they did in the last 12 months, with a further 51% expecting to commit the same amount of capital in the year ahead.
Many investors look set to put a significant amount of capital to work in the year ahead, with 48% of those investors that are planning new commitments expecting to commit at least $100m.
While there are a number of investors that plan to be very active, many others do not plan to make any new commitments; 40% of investors surveyed by Preqin do not plan to allocate any fresh capital to private real estate funds in the coming year.
As would be expected, investor appetite varies by size, with 64% of institutions with more than $10bn in assets under management expecting to make new commitments in the coming 12 months. Smaller institutions will typically make fewer commitments annually, and therefore a significant 59% are unlikely to make new real estate investments in the coming 12 months.
Appetite also varies with investor location. Among Asia-based institutions, 71% plan new commitments, while 61% of European and 56% of North American investors do not expect to be active. This appetite among Asia-based investors may be a result of changing regulations that allow more instructions to invest in real estate and an increasing desire among Asian investors to shift their focus from traditional investments to alternative asset classes in order to diversify their investment portfolios.
Despite many investors not expecting to be active in the coming year, few plan to reduce their real estate exposure; 87% of investors interviewed plan to maintain or increase their allocations to the asset class in the next 12 months, with only 13% of investors expecting to scale down their exposure.
The outlook for investors’ allocations over the longer term is particularly positive, with 92% of those interviewed expecting to maintain or increase their allocation to real estate. Even more encouraging for fund managers is that 40% of investors interviewed expect to increase their allocation to real estate in the longer term.
While more capital is being raised, the fundraising market is still a very crowded and competitive one, with capital raising a long and challenging process. Managers that held final closes in 2013 spent an average of 19.2 months marketing their funds, with one-third of these firms spending at least two years fundraising.
There are 457 closed-ended private real estate funds being marketed globally, targeting an aggregate $161bn, and many of these funds have already been in market for a considerable time; 58% of funds have already been in market for a year, while 20% have been in market for more than two years. Fifty funds were abandoned or placed on hold between January and September 2013, and managers are likely to face further tough decisions about their fundraising prospects in the months to come.
For first-time managers, it looks set to be tougher than ever to raise capital, with investors increasingly looking for managers that can demonstrate a strong track record. Just 18% of investors will definitely invest with new firms, down from 21% in 2012, and 26% in 2011.
With fewer investors prepared to invest with new managers, first-time funds are making up a smaller proportion of all fundraising. The capital raised by first-time funds which have held a final close in 2013 to date accounts for just 5% of the aggregate total, compared with 10% in 2012 and 15% in 2013.
As investor appetite for private real estate gradually improves, the rate at which private equity real estate fund managers can raise capital is starting to pick up. However, capital is increasingly concentrated among a few of the largest firms, with many newly established managers finding it harder to secure investor commitments. There will be firms that are able to raise large amounts of capital in the coming months, but in a very crowded marketplace, managers launching new funds are likely to face a long and difficult fundraising process.
Andrew Moylan is head of real assets products at Preqin