Emerging managers which are successful in attracting enough investor capital to reach a final close, on average, do so quicker than more experienced managers. For private real estate funds closed in 2013, emerging manager funds took an average of 18.9 months to close, compared to 19.1 months for all other funds. The difference is more pronounced for funds closed in 2012, with emerging manager funds taking an average of 18.4 months to reach a final close, compared to 19.3 months for all other funds. Although this may partly be due to emerging managers setting lower fundraising targets than more experienced managers, this demonstrates that fund managers raising their first or second fund that offer a compelling investment opportunity, may be able to secure capital more quickly than more established firms.
Many investors are increasingly looking for managers with a strong track record and previous experience when looking to place capital in private real estate funds, resulting in declining investor appetite for first-time funds. From December 2009 to December 2013, the proportion of investors which will invest in first time funds has declined from 56% to 29%. As such, attracting investor capital is often perceived as the biggest challenge faced by emerging managers, particularly in the current market.
Nonetheless, data from the 4,200 active investors in private real estate funds profiled on Preqin’s Real Estate Online service demonstrates the huge range of investors that will invest in either first-time funds or with spin-off teams. Fund of funds managers are particularly interested in first-time funds, with 79% interested in investing in first-time funds, and only 15% stating that they will not do so. Superannuation schemes, insurance companies and asset managers are also particularly interested in investing in first-time funds, with 38%, 37% and 36% willing to do respectively. Although a slightly lower proportion of wealth managers, 31%, will invest in first-time funds, a quarter will invest in spin-offs.
Fundraising is always a particularly challenging prospect for newly established firms, and in a very crowded market with investors increasingly focusing on managers with a long track record, it is only becoming more difficult. Nevertheless if emerging managers can present a clear and compelling investment case, and are able to reach out effectively and communicate with the wide range of institutional investors, family offices, wealth managers that will consider new firms, they have the potential to be very successful. Many sophisticated investors are keen to gain exposure to the most promising of new firms, which have the potential to be the next generation of leading private equity real estate managers.