EUROPE - European investors are moving back into property funds, but only for assets they cannot access directly, according to Patron Capital managing director Keith Breslauer.

The comments were made after the private equity firm announced that it had raised €880m – significantly more than expected - for its fourth opportunistic fund targeting distressed assets in western Europe.

"If you're trying to invest in distressed assets, it's difficult to make that work. European and Middle Eastern investors recognise that they don't have access to distressed yields, even if they can access core directly," he said.

Breslauer was cautious about extrapolating an increased appetite among pension funds for opportunistic real estate investments. "This isn't a sea change. We're on the margin of what these guys do," he said.

"It's a return-enhancer in a portfolio that might be 80% inflation-hedging. You don't invest in a fund like this to hedge inflation - you do it to enhance returns," he said.

Patron Capital Fund VI will target a yield of between 17-22% over three to five years.

Previous Patron funds attracted the vast majority of their capital from US institutional investors, but commitments for the new vehicle have come from European and Middle East investors, including corporate pension funds but also university endowments and charities. Approximately 40% have not invested in Patron's funds before.

"Among European and Middle East investors, there has been a change in culture. They tried direct. Now they come back to funds," said Breslauer.

"At the moment US investors are making the assessment they will be able to source investments in Europe from an office in Chicago. That isn't practical. They'll change their minds."

The fund has already deployed 15% of the fund's capital, including the acquisition of two high-profile distressed portfolios: the von Essen hotels and the recently completed Dutch Uni-Invest CMBS deal.

Despite widespread investor preference for seed assets, Breslauer said Patron had acquired less than 5% of the portfolio before raising the capital.

"They wanted to smell that we had access to assets, but it doesn't explain why we were able to raise more capital than expected," he said.

"The honest answer is that I don't know why. It isn't that our returns are better than those of other funds. People just know what they're getting - and we've tended to be afraid of [of using too much] leverage."

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