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Private Equity Real Estate in 2011

by Andrew Moylan

  • 16 Dec 2011
  • RE

The years since the global downturn have been extremely challenging for the private equity real estate industry, with performance of many funds dramatically affected. The recovery has been a slow one, with many problems still remaining.

Clearly fundraising remains a challenging prospect. $34.3 billion was raised in the first three quarters of 2011, compared with the $37.9 billion raised during the same period in 2010. The private real estate fundraising market has remained extremely competitive throughout 2011, with the number of funds of the road increasing from 403 in Q4 2010 to 452 in Q4 2011. The aggregate target of all funds in market has also increased, rising from $138 billion to $159 billion during the same period. It is clear that many firms believe that they can be successful in the current market, and several large funds have been launched in 2011, including Blackstone Real Estate Partners, which has a $10 billion fundraising target, as well as Rockpoint Real Estate Fund IV, Starwood Distressed Opportunity Fund IX and Westbrook Real Estate Fund IX, which are each targeting $2.5 billion in commitments.

With more funds coming to market, the firms already on the road will find fundraising even tougher. 96% of funds to reach a final close in 2010 or 2011 so far, did so having held a first close within 12 months of commencing fundraising. For the firms that have been on the road for over a year without holding an initial close, fundraising is likely to be a very challenging prospect. The slow fundraising is a result of many investors deciding not to make new commitments. The results of Preqin’s studies of institutional investors demonstrate that the proportion of investors not planning new commitments has remained consistent since February 2011, but the proportion of investors likely to invest has fallen by 10 percentage points, with a growing number undecided on their plans for the coming year. Just 35% of investors are likely to commit to new real estate funds in the next 12 months. Increasing investor caution has also led to a decline in the number of investors willing to invest with new managers in recent years. Overall, 26% of investors will definitely invest in first-time funds, a decline from 2010 when 34% would invest with new managers.

The level of dry powder available for private equity real estate fund investments was at its highest in December 2009, when there was $184 billion available to fund managers for investment. This fell to $158 billion by December 2010 and has remained near this level up to November 2011. Of the dry powder currently available, $87 billion is held by primarily North America-focused funds, $38 billion by Europe-focused funds and $33 billion by funds primarily focused on investment in Asia and Rest of World.

Private equity real estate fundraising looks set to remain extremely challenging going into 2012. The number of firms on the road remains very high and with a significant proportion of investors content to remain inactive, competition for LP capital is likely to be intense. While the largest, brand-name firms will be able to raise capital, many others will have to work hard to stand out. Fund managers will need an excellent marketing strategy and must be able to prove to investors that they have performed in both good and bad markets.

Despite inactivity among much of the private real estate investor community, a significant number of investors are still looking to make new commitments, and 41% of those that are active have said they expect to commit more capital in 2012 than they did in 2011, while only 29% expect to invest less capital. There remain however many institutions content to delay commitments given the current economic uncertainty, particularly if they have committed capital to real estate funds which has yet to be called up. The high level of dry powder available to many fund managers does mean they are in an excellent position to take advantage of opportunities in real estate markets worldwide.

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