Size Matters In Fundraising

One message is emerging as institutional investors allocate fresh capital to private equity real estate managers—size matters. Faced with their own cost constraints and performance pressures, LPs are continuing the trend of consolidating their relationships with managers and, as a result, are placing greater amounts of capital with larger firms providing a wider range of strategies. According to the latest fundraising data from data provider Preqin, 2014 saw 40% of all capital raised in closed-ended real estate funds go to the 10 largest funds in market, with all signs pointing to a continuation of that trend in 2015. While the aggregate capital raised in private real estate funds in 2014 ticked down slightly, to $90B from $92B in 2013, according to Preqin, the number of funds that held a final close dropped sharply, from 239 to 177. The 10 largest funds raised $33.38B of that equity capital. In addition, the average fund size increased more than 20% in 2014, after swelling more than 40% the previous year.

“We continue to see that it is becoming harder and harder for newer entrants and smaller managers to raise capital,” says Jeff Friedman, co-CEO and co-founder of Mesa West Capital, a Los Angeles-based private real estate debt platform with more than $3.5B of assets under management. “Across the board, our institutional investors have been telling us that they’re focused on reducing the total number of managers they are exposed to and increasing allocations to those they keep.” In January, Preqin reported that 72% of fund managers had reported increased competition for investor capital compared to 12 months ago. There are now 450 real estate funds being marketed—2.5 times the number of funds closed in 2014. All of those funds won’t succeed, but value-added, opportunistic and debt strategies are expected to fare better, being named the top three strategies of 2014. Larger investors will also continue to seek greater control over the direction of their capital. Preqin says the proportion of investors targeting separate accounts or joint ventures continued to increase in 2014, while two-thirds of investors managing assets of $10B or more were looking for co-investment opportunities alongside the managers they invested with. “We’ve seen an increasing number of investors considering separate accounts,” says Friedman. “We’ve also had a number of current investors, and groups we had not previously worked with, asking us, “What can you do for us outside a commingled fund? We want to be in debt,’” he adds. In 2015, managers can expect to see more capital flow to the real estate asset class. Fifty-five percent of investors with a real estate allocation are below their strategic targets for the asset class, and 35% plan to increase their target allocations. So, as investors’ dance cards shrink, managers who want to succeed in the new environment are potentially faced with expanding their repertoires to include more than a standard ballroom waltz. “More money is going to continue to flow to fewer hands,” says Friedman.