In a difficult market demand for opportunistic vehicles and funds of funds is rising. Richard Lowe reports
Today is perhaps as difficult a time as any to raise new funds investing outside of the powerhouse economies of Asia, as Urdang Capital Management found when attempting to raise capital for its latest commingled fund, the Urdang Value-Added Fund II. The real estate manager had originally planned to raise between $500m (€316.7m) and $650m for the commingled fund but the actual amount raised felt short of that target at just $462.8m.
Richard Ferst, chief operating office at Urdang, blamed the shortfall on non-US pension funds whose "soft commitments" to the fund did not crystallise because of concerns about the US economy.
In contrast, The Blackstone Group has raised its largest opportunity fund to date, attracting $10.9bn of capital to be invested across North America and Europe. Is this surprising given the current market and credit environment?
Anthony Frammartino, principal at The Townsend Group, certainly doesn't think so. The US-based consultancy was adviser to the Ohio Police and Fire Pension Fund when it committed $20m to the vehicle, and Frammartino admits that the volume of capital raised by Blackstone was "very impressive", but he says: "I would not go so far as to say surprising".
He explains: "Blackstone has consistently ranked amongst the strongest performers in the manager universe in which it competes and the large pool of capital served as a competitive advantage to Blackstone relative to others intending to execute a similar strategy. To the extent that leveraged buyouts were one of the goals of Blackstone and others at the time, Blackstone did not need to partner with anyone. This also allowed them to focus solely on execution as opposed to working through issues that can arise when you have other partners at the table.
That strategy was deemed very appealing, so the large fund size was appropriate given that it worked for their strategy. You had a timely strategy executed by someone eminently capable of exploiting it, which is why their raise was so successful - and fast."
Frammartino confirms there is currently global appetite for opportunistic vehicles, not least because there are always investors in the market "seeking higher returns and lower correlations to traditional asset classes".
More importantly, he suggests, there are today more ways to invest opportunistically than ever before and "the level in which investors can refine their strategies is unprecedented".
He continues: "The large global funds are still there and for many offer a compelling manner in which to invest capital and obtain a global team to make allocation decisions by regions, property types and strategies. However, now you can invest in quasi-debt opportunities, real assets focused strategies, specialised property types and emerging markets."
Meanwhile, the global real estate fund of funds (FoF) industry continues to develop at a pace. Morgan Stanley is one of the latest companies to enter into the space, while Goodman Property Investors has launched an Asia Pacific vehicle, the third in its international suite of FoF products. Goodman has also launched its second European FoF.
Joseph Stecher joins Morgan Stanley from Goldman Sachs as managing director and chief investment officer of the new business which promises to offer "solutions to clients seeking exposure to a global portfolio of opportunistic and value-added real estate funds, secondaries and co-investments, while seeking to provide superior risk adjusted returns."
FoFs are "really flavour of the month", says Andrea Carpenter, director of research and market information at the European Association for Investors in Non-listed Real Estate Vehicles (INREV), which has launched a FoF directory and is producing a report on the industry.
"The sector is bringing in a lot of new investors and offers ways for existing and new investors into places like Asia and more niche sectors," she says.
Indeed, with cross-border capital flows to Asia up around 100% (according to Real Capital Analytics), it is clear there is a huge demand from institutional investors to gain exposure to the region.
FoFs are proving a popular way in without needing to have a high level of experience
Andrew Smith, head of investment strategy and deputy managing director at Goodman Property Investors, cited this increasing demand as the reason behind its recent FoF launch.
"This demand reflects both the increasing appetite for cross-border property investment and the current performance and diversification opportunities the region now offers," he said.
Carpenter makes the point that many investors committing to Asia Pacific FoFs will not have invested in the region before and may even have only held direct investments before. "FoFs can therefore provide them with a route where they gain automatic exposure without having to lay out their own resources and build up their own network and their own knowledge," she says.
But it is also the general proliferation of underlying commingled funds that is consolidating the role of the FoF manager. "The growth of the underlying fund is quite rapid and if you are an investor it might be quite daunting," Carpenter says.
"Your fund selection process is now a lot more difficult than it used to be, because you have a much wider choice."
There still remain two pivotal concerns that investors have with FoFs. One is the double layer of fees they incur - not only do you pay a manager fee, but you also pay the fees of the underlying funds. FoF managers, however, invariably argue that this is more than made up for by the fact that they handle everything including regulatory, legal and reporting issues. "You get this as well as just paying for the fund selection," Carpenter says. "A lot of people see that as a good pay-off in terms of not having to put your own infrastructure in place."
The second issue concerns possible conflicts of interest. There are pure FoF managers in the market and others that are first and foremost fund managers that also have a FoF operating platform. And whether FoF managers are allowed to invest in their own underlying funds varies from case to case.
"The industry is still working out the possible conflicts of interest that there could be from being a fund manager and also running a FoF business," Carpenter says. They are all handling it in their own way, with some saying it is not an issue because they are being transparent about what they are doing."