Real estate fund of funds have been a significant source of capital for private equity real estate fund managers, as well as enabling investors that lack experience or resources to access the asset class. However, fund of funds managers have not been immune to the difficulties caused by the financial downturn, and have found it just as difficult to secure commitments for their funds as managers across the real estate fund spectrum.
The tough market conditions of 2009 and 2010 are continuing into 2011. Managers are launching fewer funds and targeting less capital than during the industry peak between 2006 and 2008, while the number of funds closing and the amount of capital raised has fallen significantly. Of the 21 real estate funds that closed between January and April 2011, not one of them was a fund of funds vehicle.
The market share of funds of funds has remained stable in the past five years, with these vehicles accounting for 3-4% of the overall capital raised by all private real estate funds. However, the amount of capital sought has been declining annually since 2008. In April 2011, there were 26 real estate funds of funds in market targeting an aggregate $5.4 billion. 12 were North America-focused, seeking $2.7 billion, eight focused on Asia and Rest of World targeting $1.9 billion and six Europe-focused vehicles were aiming to raise $0.8 billion.
Funds of funds can be structured as either open-end or closed-end vehicles, while a few make underlying private fund commitments despite being listed on a public stock exchange. Preqin data shows that 82% of funds of funds are private closed-end funds, 15% are open-ended and 3% are listed vehicles.
Fund of funds vehicles are particularly important for first-time fund managers. They generally have the experience and resources required to implement the additional due diligence needed on first-time funds, so it is no surprise that 66% of funds of funds will commit to first-time managers, and a further 18% would consider doing so. A number of funds of funds invest solely in emerging managers, such as the $400 million American Value Partners Fund I operated by AVP Advisors.
Seven funds of funds that closed between 2009 and April 2011, and eight of the funds of funds in market, are Asia and Rest of World-focused vehicles, showing that investors can access emerging markets and regions that they are unfamiliar with through funds of funds. Institutions can also develop a globally diversified portfolio through one fund of funds commitment; 76% of funds of funds that closed between 2009 and April 2011, and 62% of funds of funds in market, target two or more continents.