Market conditions have caused a shift in the strategic preferences of institutional investors. The higher-risk strategies are viewed less positively and there has been an increase in appetite for low-risk core funds. Preference for value added and opportunistic funds has decreased in the last 12 months, and although there has also been a small decline in appetite for core funds in 2011, these vehicles are still the most favoured strategy for investors in private property funds.
Increased caution amongst institutional investors has also had an impact on attitudes to first-time funds, with the number of investors willing to invest with new managers decreasing in recent years. Overall, 26% of investors will definitely invest in first-time funds, with an additional 15% willing to consider first-time vehicles; the corresponding figures in 2010 were 34% and 16% respectively. 11% will only commit to first-time funds if they are operated by spin-off firms (16% in 2010) and the proportion of investors not willing to invest with first-time managers has increased from 34% in 2010 to 48%.
Investors are scrutinizing potential investments more closely than ever and, while the largest, brand-name firms will still be able to raise large funds, many institutions are looking for firms which can prove they are specialists in their particular market. Many of the firms that have been fundraising successfully in 2011 are managing funds which are focused on a particular sector and/or location and where the team has a proven track record in these markets.
In September 2011, there were 442 private equity real estate funds on the road, targeting an aggregate $151.5bn in investor commitments, more than the 400 funds that were in market in September 2010, targeting a total of $129bn. As many institutions have either placed their private real estate investments on hold, or have reduced their usual capital outlay to the industry, competition for investor capital will remain intense in the next 12 months and identifying investors that are willing to make commitments will be critical. Fund managers that can demonstrate that they will be able to navigate a difficult market, achieve successful returns for their investors, and are managing funds that are consistent with the revised aims of the institutional investor universe will be successful in raising new funds.