Preqin, the multi-national data and consulting firm, in its latest Real Estate Spotlight, features a review, by Farhaz Miah, of private real estate fundraising in 2011, which finds (unsurprisingly), that debt strategies “have become increasingly popular in recent times, with fund managers seeking to exploit opportunities presented by market dislocations.” The top four largest funds to close in that year each used debt strategies in various degrees.
Miah, using data collected for the 2012 Preqin Global Real Estate Review, begins his discussion with the history of fundraising in this market since 2008. The first three quarters of 2008 were “the most successful quarters for private real estate ever.” During that period, 219 funds reached final close, with a combined $121.7 billion in commitments.
The fourth quarter of 2008? … Not so much. The aggregate capital raised that quarter was less than half that of the quarter before. Aggregate-commitment numbers continued to decline through 2009 and remained at depressed levels for 2010, and 2011.
In the year just concluded, then, fundraising “continued to be afflicted by the uncertainty” that has been endemic in the real estate industry for three years now.
Geography and Strategy
Europe played a larger role in the globe’s real-estate fund-raising picture in 2011 than it had in 2010. Europe accounted for only 13 percent of global fundraising in 2010, and that number rose to 20 percent in 2011. Asia lost share, falling from 28 percent (2010) to 17 percent. Miah suggests that this shift is “due to investors focusing efforts on domestic opportunities and orienting away from perceived risk in emerging market investments.”
The breakdown by strategy of fund-raising in 2011 is set out in the pie chart below. There is some overlap of the strategies, because many large opportunistic funds, included in the green slice, incorporate both debt and distressed strategies in their over-all structures. Nonetheless, you can see that specifically debt-strategy oriented funds receive the largest slice of the pie, with opportunistic funds a close second.
The largest two funds that closed in 2011 were each managed by Lone Star Funds. The larger of these, Lone Star Real Estate Fund II, raised $5.5 billion. It will pursue debt, distressed, and opportunistic investments in North America, Western Europe, and Asia.
The same issue of Preqin’s Real Estate Spotlight included a piece by Sarah Unsworth, looking at the current “investor appetite for private real estate and prospects for fundraising in 2012.” She concurs with Miah that the private real estate sector still suffers from the impact of the 2008 crisis. She also suggests that matters are unlikely to improve quickly.
“Investor appetite for private fund commitments is lower than it has been in the past two years,” she writes, with only 36 percent of investors surveyed saying that they are likely to commit funds in 2012. A year ago that number was 45 percent. Two years ago it was 47 percent.
An institution’s willingness to commit to real estate in 2012 varies with geography and with the assets it has under management. Forty-one percent of those surveyed in North America expected to commit funds in this market in 2012: only 30 percent in Europe. Large investors are more likely to expect to commit funds than their smaller AUM colleagues.
The survey also asked investors how they would prefer to be contacted about a potential investment in a real estate fund. As the pie chart below indicates, there preferred method is contact through e-mail documentation “without a follow-up call.” A very near second is contact through an investment consultant (39 percent.) In either case, the investors seem to want to keep the fund managers at bay. The large slice of those who want to be contacted only through a consultant shows, Unsworth notes, how important consulting firms have become as gatekeepers.