Private equity real estate fundraisers are gaining traction in Europe after a record year in 2014, writes Andrew Moylan, head of real assets products at fund data provider Preqin.
Private equity real estate fundraisers are gaining traction in Europe after a record year in 2014, writes Andrew Moylan, head of real assets products at fund data provider Preqin.
The large amount of attractive distressed opportunities available as financial institutions have accelerated the deleveraging process has meant many investors are increasingly looking to Europe. Fundraising for European real estate funds increased significantly over the last year, demonstrating the increased institutional investor appetite. The strong institutional interest in private real estate investment is likely to continue in 2015, with 72% of Europe-based investors planning to invest domestically in the next 12 months, up from 58% which stated so in Q1 2014. Appetite for European investments has also increased among North America-based investors, from 16% targeting the region in Q1 2014 to 26% in Q1 2015.
On the back of this increased appetite, fund-raising is also gaining momentum in Europe. In a survey of private real estate fund managers conducted by Preqin in Q4 2014, a considerable 88% of Europe-based fund managers stated that investor appetite had increased over the past year, with none stating that they have seen a decrease in appetite.
Our fund-raising data reinforce this trend. 2014 saw the aggregate capital raised by funds reaching a final close increase to a record high of €28 bn raised by 47 funds. This is more than double the €12 bn raised by 40 funds in 2013. As a result, the average fund size of Europe-focused funds reached an all-time high of €637 mln, compared to €316 mln for funds closed in 2013. So far in 2015, we have seen four Europe-focused funds reach a final close, raising an aggregate €1.4 bn as at the end of February.
Fundraisers more likely to hit or exceed their targets
The time managers spend marketing their funds has declined as investor appetite has increased, although fundraising remains a long process for many. In 2012, it was taking an average of 21 months for managers to close funds, with this falling to 18 months for funds closed in 2014. Additionally, funds focusing on European investments are more likely to hit or exceed their target sizes at a final close, with funds closed in 2014 raising an average of 106% of their target, compared to 85% for funds closed in 2012.
As a result of a growth in fundraising for the region, Europe-focused dry powder (uncalled committed capital available for investment) has reached its highest ever level as of February 2015, at €58 bn, compared to €31 bn in December 2012. Consequently, managers of Europe-focused private real estate funds have considerable amounts of capital available to invest and most remain confident in their ability to find attractive opportunities; 59% of Europe-based fund managers surveyed by Preqin responded that they plan to invest more capital in 2015 than in 2014, of which 30% stated that they would be investing significantly more.
Opportunistic funds
2014 saw opportunistic funds attract by far the most amount of capital for Europe-focused funds, with 13 vehicles raising an aggregate €10.4 bn. However, over half of this capital was accounted for by Blackstone Real Estate Partners Europe IV, which raised €6.6 bn for distressed and opportunistic European investments. For Europe-focused funds closed in 2015 so far, two primarily focus on opportunistic investments, Kitty Hawk Capital Partners III and Vier Metropolen, which raised €290 mln and €200 mln respectively. One fund closed in 2015 focuses exclusively on debt investments, German Senior Debt Fund, with Rockspring UK Value 2 Fund focusing primarily on value-added opportunities.
Interestingly, in terms of location focus, two of the four Europe-focused funds to close in 2015 so far focus exclusively on investments in Germany, including the largest fund to close in the year so far, German Senior Debt Fund. The fund, managed by Deutsche Asset & Wealth Management, raised a total of €500 mln in institutional capital to invest in German senior commercial real estate loans. The other Germany-focused fund to close in 2015, Vier Metropolen, is one of the first funds to be raised in accordance with Investment KG, a new pooling vehicle under the Kapitalanlagegesetzbuch (KAGB) in Germany. It will invest in project development for residential properties in four large German cities; Berlin, Hamburg, Munich and Frankfurt.
Outlook for 2015
With institutional appetite likely to remain strong in 2015, the outlook for the 81 Europe-focused closed-end private real estate funds being marketed is positive. Indeed, a total of €7.3 bn has already been raised by these funds through interim closes. However, many managers still view the market as competitive, with 69% of Europe-based fund managers believing that competition for capital has increased over the last year, particularly as investors increasingly look to firms with proven strong track record. Standing out from the crowd is consequently becoming increasingly difficult for managers, meaning that those without a strong track record will need to be able to successfully demonstrate how they are best placed to find value in the current competitive market.
With many managers intending on deploying greater amounts of capital in investment opportunities in 2015 than they did in 2014, competition for assets is high. No less than 74% of European managers believing that there is more competition for core assets, while the figure for value added/opportunistic is slightly lower but still high at 64%. While there are attractive opportunities available, firms will have to work hard to find value in a market awash with capital.
Andrew Moylan
Head of real assets products Preqin