NORTH AMERICA - Smaller private equity-style real estate funds are outperforming their larger counterparts in the North American property markets, according to Preqin.
The data analysis company found that the majority (54%) of funds with less than $500m (€349m) under management were outperforming the median when assessed according to its performance quartile rankings.
The rankings, which are calculated by allocating each fund a quartile based on its performance relative to other funds of the same vintage, also showed that 30% of small funds were ranked as top quartiles, while only 20% were in the bottom quartile.
In contrast, only 23% of large funds with more than $1bn under management were producing top-quartile returns, and 60% of these 'megafunds' were producing returns below the median.
That said, funds with more than $500m under management launched in 2001 have produced stronger returns than their smaller counterparts, with a median internal rate of return (IRR) of 30.2%.
But for each vintage year between 2002 and 2008, the median IRR of small funds exceeded that of $500m-plus funds.
Andrew Moylan, real estate data manager at Preqin, said: "Given that many larger funds appear to have underperformed in recent years, investors might be expected to focus on the small to mid-size funds - the size of the funds that have been successful in raising capital in 2010 and 2011 certainly suggests this is the case.
"A number of mega funds were launched in Q1 2011, so these managers clearly feel investor confidence is returning, but while Preqin's conversations with investors do indicate they are more likely to make new commitments, fundraising will remain challenging given the number of funds on the road."
He added: "Manager selection remains important, and there is a great deal of variation between the best and worst performing funds. As uncertainty remains in the real estate market, institutional investors are looking for managers that can prove they can create value.
"Large, brand-name firms that have been successful in the past will no doubt continue to be successful in the future as confidence returns to the asset class.
"For firms whose funds have not performed as well, raising capital in 2011 is likely to be far harder, as institutions increasingly look to funds with more focused strategies."