Will Fundraising Slow Down in 2016?

With more than $221B of real estate dry powder and U.S. investors questioning how to position their portfolios for late-cycle investing, private equity real estate fundraising in 2016 could be on track to slow.

Private equity real estate GPs should brace themselves for a pullback in fresh allocations in 2016, thanks to the overhang of dry powder and maturing portfolios.

Distributions to LPs in 2015 are expected to reach all-time highs of more than $187B, but Lori Campana, a partner at the Boston-based placement agent Monument Group, expects fundraising for commingled funds to slow slightly in the next 12 months as investors—and managers—become more cautious in their investments.

There was more than $221B of dry powder sitting uncalled in private equity real estate funds as of the end of November 2015, according to Preqin, thanks in part to a strong fundraising environment, with more than $96B raised in 2015.

However, Campana says a slowdown is inevitable for managers targeting a fund close in 2016. “There is such an overhang of dry powder facing managers, even though we had some of the most active drawn–down activity we’ve seen for a while in the second half of the year,” she says.

Part of the challenge is balancing “compelling” opportunities in the current cycle, she says, against the limited liquidity within their mature portfolios.

Asian investors, however, could represent a bright spot in the fundraising landscape and could offset any pullback from U.S. and European investors, says Campana. “Cross-border capital is definitely here to stay, and Asia is undoubtedly one of the most important fundraising markets to be in today.”

While most investors in Asia have traditionally targeted separate account or club deal structures, Asian LPs are becoming much more sophisticated and diverse in how they invest globally.

Campana adds that fundraising in the region is a long-term relationship. “You don’t meet an investor in Asia and come back with a check after one visit. You meet them many times, and you meet the hierarchy within their organization. It’s a long relationship-building and educational process,” she says. “It’s a lot of baby steps and requires patience and flexibility.”

One fundraising trend that is set to continue in 2016, Campana predicts, is the bifurcation between the “haves and have-nots,” In 2015, the top five real estate fundraises accounted for more than a third of the total equity dollars raised, with Blackstone Group raising $15.8B for its eighth opportunity fund and Lone Star raising $5.8B for its Fund IV.

Monument Group assisted Beacon Capital Partners garner $1.4B for its Strategic Partners VII fund in 2015. Campana says LPs are increasingly looking to value-add strategies across sectors but are also emphasizing the importance of pre-specified portfolios from GPs.

“It’s always been part of the format, but in a mature market you need to differentiate yourself, and pre-specified assets give you a competitive advantage,” she says. Beacon Capital’s fund was approximately 25 percent pre-specified during its fundraising, and the ability to demonstrate such “access to deals was tremendously helpful.

“The difficulty for any manager is, how do you turn those pre-specified deals into closed deals without abundant closed capital?,” asks Campana. “It’s about a strong and trusted reputation and getting early investors excited to commit to the fund and provide co-investment capital.”