The outlook for opportunistic fund managers is more positive now than it has been for several years. Andrew Moylan looks at the latest capital-raising figures
Private real estate fundraising has improved considerably in recent years, increasing from a low of $47bn (€33.9bn) raised by 186 funds reaching a final close in 2010, to 179 funds raising an aggregate $82bn in 2013. Europe-focused fundraising, in particular, has surged, with €8.8bn being raised by the nine funds closed in Q1 2014, which represents the most successful quarter ever. Much of this capital was raised by Blackstone Real Estate Partners Europe IV, which closed with €5.1bn in March, becoming the largest European private real estate fund.
A recent trend among institutional investors is a move up the risk-return curve due to concerns over the availability and pricing of prime real estate. This has resulted in a notable increase in appetite for opportunistic funds, which managers have been quick to capitalise on. Figure 1 shows that investor appetite for opportunistic private real estate has increased considerably since the start of 2012, with 42% of investors including this strategy in their fund searches from Q1 2012 to 59% in Q1 2014.
As investors have moved towards higher-risk investments, appetite for core real estate funds has correspondingly declined. Just 35% of investors are targeting the strategy in the next 12 months as of Q1 2014, a significant decline from the 52% of investors that targeted this strategy in the 12 months from Q1 2013.
The majority (64%) of investors targeting opportunistic real estate funds in the next 12 months are based in North America; 21% are in Europe, 11% are located in Asia, and 4% are outside these three regions.
As with core, fundraising for primarily opportunistic private real estate funds also improved in 2012 (see figure 2). Eighty funds raised a total of $33bn, a significant increase on the $20bn raised by 69 opportunistic funds that closed in the previous year. Last year, the number of opportunistic funds that reached a final close decreased to 63, although the aggregate capital raised increased slightly to $36bn, suggesting that capital is more concentrated among fewer fund managers.
Although this demonstrates the shift in sentiment among investors up the risk-return curve, capital raised by opportunistic real estate funds that closed in 2013 was still less than half that raised by funds closed in 2008.
Fundraising for closed-ended core funds more than halved from 2012 to 2013, decreasing from 35 funds raising an aggregate $6.5bn in 2012 to just 11 funds that closed in 2013 raising a total of $2.3bn.
Some 61% of capital raised by primarily opportunistic funds closed in 2013 and 2014 to date is focused on North America. However, capital raised by European opportunistic funds has increased considerably, from €800m in 2010to €3.2bn in 2013. Opportunistic managers appear to be having more fundraising success, with the average amount of time they spend on the fundraising trail falling, and many reaching or exceeding their targets. Nearly two thirds (64%) of the primarily opportunistic funds that closed in 2013 reached or exceeded their targets, compared to only 42% in 2012. Additionally, a considerable 32% of the opportunistic funds that closed in 2013 did so on 125% or more of their targets, illustrating the appetite for this strategy.
Starwood Distressed Opportunity Fund IX is one example of a primarily opportunistic fund that closed in 2013 that significantly exceeded its target. Managed by Starwood Capital Group, the fund reached 168% of its $2.5bn target, raising $4.2bn. Furthermore, opportunistic funds that closed in 2013 spent less time on the road than other private real estate funds, averaging 16 months to close, compared to 19 months for all other funds.
As of April 2014, there were 134 primarily opportunistic private real estate funds on theroad, targeting commitments of $48bn, increasing from the 118 funds on the road in April 2013, which also targeted $48bn. The increase in the number of opportunistic funds on the road demonstrates the confidence fund managers have to attract capital.
Blackstone Group is managing the largest opportunistic fund, Blackstone Real Estate Partners Asia, which is seeking $4bn across Asia. Carlyle Group’s Carlyle Realty Partners VII is the second largest opportunistic fund targeting $3.5bn in commitments.
Experienced managers account for a large proportion of firms raising opportunistic funds, with 27% of primarily opportunistic funds in market accounted for by managers that have raised five or more private real estate funds previously, and accounting for 48% of capital sought. However, 32% of opportunistic funds in market are being raised by first-time managers, although these funds account for only 15% of capital sought due to emerging managers typically setting lower fundraising targets.
As investor appetite for opportunistic real estate grows and fundraising improves, the outlook for opportunistic fund managers on the road is more positive now than it has been for several years. While both well-established and merging managers raising funds will be able to attract investor capital, investors preferred managers with long track records, so newer firms will need to present a compelling investment case in a very crowded environment.
Andrew Moylan is head of real assets products at Preqin