Since 2010, 49 funds of funds have reached a final close, cumulatively raising $11bn. As the chart below shows, 2012 was the peak for fundraising in terms of the amount of capital raised ($4.3bn), although this is mainly due to the closure of Fondo Investimenti per l’Abitare on €2bn. The fund is focused on investments in the social housing sector throughout Italy, with the aim of increasing the supply of social housing units which can then be let at affordable rates and sold at subsidized prices. Since 2012, the number of funds has been in decline, while aggregate capital raised has fallen to approximately $1bn annually. The drop could be attributed to the increasing sophistication of investors within private real estate, as well as the search for higher returns in the current market.
The underlying strategies targeted by fund of funds vehicles suggest a preference for vehicles at the higher end of the risk/return spectrum. Of the 49 funds closed from 2010 to present, 76% sought opportunistic private real estate funds and 63% targeted value added funds, unsurprising considering funds of funds need stronger performing vehicles to justify the dual layer of fees that reduce investor returns.
The pipeline for private real estate funds of funds coming to market has been fairly consistent over the last few years. Preqin’s Real Estate Online currently tracks 17 private real estate funds of funds in market, which are collectively seeking $5.1bn in institutional investor commitments, similar to the same time last year (16 funds targeting $5.4bn).
While there has been a decline in private real estate fund of funds vehicles reaching a final close, some investors will continue to maintain investment in funds of funds as part of their portfolio. From an investor perspective, funds of funds can help achieve diversification for a real estate portfolio, provide access to niche strategies and managers, and act as an entry point for newer investors in the asset class that may be unfamiliar with private real estate investment. Securing capital commitments is still possible for funds of funds; in January 2015, Siguler Guff held a final close for its real estate fund of funds vehicle, Siguler Guff Distressed Real Estate Opportunities Fund II, on $877mn, above its initial $750mn target. The fund will seek to assemble a portfolio of best-in-class manager relationships focusing on various types of real property interests, including equity interests in commercial property, commercial mortgages, commercial mortgage-backed securities and the debt and equity securities of real estate operating companies or real estate investment trusts primarily in the US and Europe.