Using Individual fund-level performance data to track call-ups and distributions over time indicates signs of returning confidence in the private real estate fundraising market. The rate of new deals is picking up and investors are receiving more in the way of distributions, which may in turn lead to an improvement in the current slow fundraising environment.
Private equity real estate funds called up $36bn of equity in 2005, with the amount invested increasing to $69bn in 2006 and $129bn in 2007. As would be expected 2005, 2006 and 2007 vintage funds were responsible for the majority of the investments made in 2007, with these accounting for $34bn, $48bn and $27bn respectively. The amount of capital invested declined the following year when $90bn of equity was invested. The economic downturn had a major impact on the number of real estate transactions worldwide and private equity real estate fund managers made far fewer investments during 2009; just $61bn was called up.
Despite this, there was an increase in deal activity during 2010. Confidence slowly started to return to real estate markets and fund managers were provided more opportunities due to overall market conditions. $108bn of equity was invested in 2010. $38bn of this was from 2007 vintage funds, $24bn from 2008 vintage funds, and $12bn from both 2009 and 2006 vintage funds.
The amount of capital distributed back to investors grew each year from 2001 to 2007, as the private equity real estate industry expanded and overall fund sizes increased. The constriction of financial markets had a significant impact on the exit environment, and as a result the level of distributions declined in 2008, falling to $27bn from $60bn the previous year. The full impact of financial crisis hit the private equity industry as a whole in 2009, with the year seeing even fewer distributions, with just $18bn returned to investors. While still well below the levels of 2006 – 2007, $28bn was distributed to investors in 2010, a sign of increased transaction activity by real estate fund managers.
Private equity real estate fund managers are presently seeing more opportunities to deploy their dry powder and are also exiting more of their existing investments. The private equity real estate fundraising market was extremely slow during 2009, with very few institutions making new commitments. Caution as a result of the economic downturn was clearly an important factor, but the comparative lack of activity by real estate fund managers also contributed to the industry slow down. Many investors had significant amounts of capital committed to private real estate funds that had not yet been called up, and additionally most LPs were receiving little in the way of distributions from their existing fund investments. As a result, many institutions were content to remain on the sidelines and not make new investments. As market conditions improved across 2010, fund managers were able to increase their deal and exit activity and consequently investors will be seeing their capital called up and will see more distributions.
With the investment cycle kick-started again, it seems likely that institutions receiving additional distributions will be more active in the asset class over the coming months.