Little-known Middle Eastern family offices, institutions, pension funds, and insurance companies are set to become long-term private capital partners internationally as they look to increase their allocation to the asset class. As real estate capital flows become increasingly global, attention has largely been paid to the investment appetite of large Middle Eastern sovereign wealth funds. However, Piyush Bhardwaj, former head of transactions and asset management at Mubadala Prudential Real Estate Investors, says second- and third-tier Middle Eastern investors, comprising single and multifamily offices, high-net-worth investors, institutions, pension funds, and insurance companies, were set to dramatically increase their international real estate portfolios, especially in the U.S., and in the process would “become consistent capital providers [to GPs]. The second- and third-tier investors are quite sophisticated and have appetite for opportunities throughout the U.S. Piyush Bhardwaj, formerly of Mubadala PREI “Middle Eastern capital has a history of being very active in the U.S., yet few people look for it,” Bhardwaj says. “This capital is here to stay for the long run, and it will truly become a capital source of choice for many managers and operators. Middle Eastern capital likes to grow along with the managers and operators.” He stresses that many investors in the second tier are active through real estate cycles. Bhardwaj, who raised capital for the Mubadala PREI joint venture and is now working with U.S.-based investment managers to structure products catering to Middle Eastern investors, says managers have underestimated the scale of the capital in the Middle East. In Qatar alone, 6 percent of inhabitants have net worths of more than $100M each, and a further 17.5 percent of the population is designated as millionaire households. The Kingdom of Saudi Arabia alone potentially has hundreds of untapped pockets of capital. “There is also an abundance of Sharia-compliant capital and not enough operators and managers catering to it,” he says. “A common misperception is that it is very difficult to structure transactions in a Sharia-compliant manner.” Bhardwaj says second- and third-tier investors are often more flexible sources of capital, favoring value-added and opportunistic strategies. Most look for long-term investments rather than a closed-end fund structure, with some eager to invest in or develop platforms through which they can channel investments. Co-investment opportunities are also sought, as the investors want more control over decision-making. With increasing investor appetite for direct and co-investment real estate deals, fund managers such as small and midmarket GPs have had to start diversifying their investor base, Bhardwaj says. He adds that U.S. investment managers have been spoiled, because there’s always been so much domestic capital available and they’ve never felt the need to source foreign capital. “They are saying, for us to stay in business, we need to look for other sources of capital,” he says of U.S. investment managers. “People need to peel back the onion [of second- and third-tier Middle Eastern investors], because there are so many of them, and they’re looking to invest.”
Capital from little-known Middle Eastern institutions and family offices will increase dramatically as investors look for returns and diversification outside the region. Value-added and opportunistic strategies in the U.S. and co-investment will be favored.
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