UNITED STATES - Investors are abandoning smaller US private equity property funds, and opting instead to commit capital to "megafunds" to avoid navigating a saturated market. 

In a paper published last week, private equity intelligence firm Prequin cited the Pennsylvania State Employees' Retirement System, which committed $US75m (€47.5m) to the Oculus Small Cap Real Estate Fund I - a fund-of-funds - because it "lacked the staff to research the multitude of funds on the road".

The firm claimed many funds are struggling to raise equity despite forecasts, suggesting they will this year top the US$97bn raised by 175 funds last year.

Despite strong fundraising so far this year, the number of funds achieving final closes "has not been as impressive," it said.

So far this year 50 funds have reached closure, but 70% of the total capital raised went to 17 funds include the MGPPA Asia Fund and Blackstone Real Estate Partners IV - raising more than US$1bn.

Just over 375 funds are currently scouting US$203bn - a 38% increase from the beginning of the year.

"Although fundraising has been increasing steadily over time, the number of vehicles on the road has been increasing at a much faster rate," the paper said.

"This congestion in the fundraising market has had a significant effect on the amount of time it is taking managers to raise their funds."

Funds closing in 2008 spent an average 12.7 months fundraising - a 28% increase from 2006.

"The private equity real estate market is in serious danger of becoming over-saturated," Prequin said.

"If the market were to become any more congested, then increasing numbers of fund managers may be unable to secure enough commitments in order to reach a final close, resulting in funds having to revise targets or even being abandoned."

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