Want to Build a Successful Fund? Try This.

With a large number of private equity real estate funds in the market, and rules about approaching new investors outside of the U.S., it’s more important than ever to maintain relationships and know the right way to court potential new capital sources, both large and small, says Monument Group partner Lori Campana

Privcap: What are some of the most interesting fundraising trends that you’ve seen in the past year?

Lori Campana, Monument Group: This is tough because, for us, it’s been a little different. It’s been a year of not finding a lot of compelling real estate strategies that we have wanted to put our name on and invest in.

I think it’s a reflection of the market because we’re driven to raise a fund if we think it is a good strategy and team to execute at this time in the cycle and investors will have an interest. And on a relative basis, we found a lot more interest from investors for private equity. When we see the numbers, it’s always private equity—the allocations overwhelm because the way people bucket things, whether it is venture or private equity, the bucket is broader than their real estate allocation. It does feel as if the tilt has been more toward private equity in terms of investor interest.

So we’ve been spending considerable time looking at a lot of real estate, trying to determine what we can get behind and get excited about to bring to market.

What are you seeing when it comes to LP appetite for mid-market funds? Is the concentration of capital going to the big guys?

Campana: I don’t have it in front of me, but typically, when you open up the quarterly assessment of where capital has gone, [it’s to] the top 10 largest funds.

If I’m a typical investor, unless there’s some intrinsic policy that says we’re not doing funds that are $10B, it’s is difficult to ignore these funds if they are benchmarked against the market. They are going to do Blackstone, Lone Star, Rock point.

When I think midmarket, I think $500M to $1.5B. There are so many firms seeking to raise capital in this range, and the good [funds] do get raised. The track record, it’s consummately important, [the] tenure of the team, all the same factors still apply, but you need to work hard to retain your existing investors, [and] simultaneously explore new pockets of investors.

Has [fund allocation] changed in the past couple of years? I am not sure. Perhaps around the margin, those seeking capital need to be patient with the process.

How do you begin conversations to try to pick up new investors?

Campana: Asia’s the best example. One, you have to be of [a certain] size to go to Asia—about a $1B. You need to have a certain roman numeral on your fund. You need maturity in your track records, and they need to be top performing funds.

You have to be patient and plan many meetings and trips to build relationships. And you should have a brand name. And your strategy in Asia generally has to be more core-like. There are a limited number of investors who will look at higher-return strategies.

Europe’s a bit of a quandary because of FIRPTA and AIFMD, and now Brexit has the U.K. in a greater state of uncertainty. So there’s a higher bar for funds to go to Europe for investors and a more careful process for fundraising. It is worthwhile, certainly, for certain strategies as there are sophisticated and large investors so it requires working diligently to understand each country’s regulatory environment and investor interests well in advance.

When you look at markets beyond the U.S., whether it’s piecemeal or not, it’s a select investment. It’s a limited universe of investors for particular strategies, if you’re a U.S.-based GP.

And within the U.S., there are definitely investors. They keep managers on a watch list and they might have watched them for two funds and now they’re consider a commitment to this next fund. So in the U.S., it’s more consistent communications…fundraising is hard work before, during, and after the fundraise.

Do you think it’s taking longer? Do you think [the fundraising process is] much, more about those relationships and constant touch points, being much more personal about the way that you build those relationships?

Campana: Yes, definitely. But also having a good story to tell, and being something…that the investor—and I include consultants in that—can view as something differentiated for their portfolio.

There are currently 505 funds in market, according to Preqin. Is that too much for the industry?

Campana:

If you look at the numbers, some of what’s out there that’s in that 500 number, it might be…raising $100M, you should knock those out. That’s not competition for billion-dollar funds. So you really have to delineate all those funds and statistics and realize who are truly the institutional funds that investors will consider.

There [are] a lot of general partners, they’re not general partners, but real estate investment people who have had capital on a deal-by-deal basis, looking to convert to funds because they realize it’s incredibly inefficient to do it the way they’ve been doing [it] and they’ve been the operating partner for some very big funds. And they say, “We just want to go direct to the investors,” not necessarily realizing it’s not so simple. I think those 500 or so funds include groups like that too.

So out of that 500, it’s maybe 200 that are really [fundraising] at any one point in time and competitive for institutional allocations—then you need to break that down by sector, geography, etc.—so the competitive universe to an institutional fundraise is generally much smaller.

And can you really put a Blackstone in the same category as your $100M sole investment?

Campana: It’s almost like you can’t even put them in a billion-dollar fund category. I struggle with it because, we work with a talented opportunistic manager with fabulous performance, a great team, a great strategy, good investors and some people will consider Blackstone versus them, but it’s so different. You could allocate to both, but some people say, “OK, Blackstone’s my opportunistic allocation, and I get benchmarked against what includes Blackstone. So it’s a safe bet for me.”