Private Real Estate Fundraising: Signs of Improvement?

by Farhaz Miah

  • 11 May 2012
  • RE

There has been a steady increase in the number of interim closes and aggregate capital raised for these interim closes between Q1 2009 to Q4 2011. Only 12 funds held an interim close in Q1 2009, raising just $2.5bn, and fundraising remained weak throughout the rest of the year.  The aggregate value of interim closes started to become more significant from Q2 2010 onwards, however, with a total of $4.8bn raised through interim closes held by 38 funds in that quarter.

The steady increase in the number of interim fund closes and the capital raised for these closes continued into 2011, peaking at $9.9bn, which was raised by 45 funds in Q3 2011. This suggests that investor appetite for private real estate has been recovering, with more institutions committing capital to new funds.

Further evidence that momentum has been gathering in the private real estate fundraising market is shown by the increase in the number of funds on the road which have held an interim close. The proportion of funds in market to have held an interim close has increased steadily from 31% in April 2010 to 41% in April 2012. The amount of capital raised by all funds that are in market as of April 2012 is $33.2bn, more than double the $14.9bn which had been raised through interim closes by all funds that were in market at the same time in 2010.

This gives further grounds for cautious optimism in the fundraising arena. As investors being making fresh commitments to funds in market, a growing number of fund managers are able to hold that all-important first close and start putting capital to work. There is $29bn in dry powder available to funds which are still seeking capital from investors, representing a sizeable 18% of the $161bn total dry powder available, showing the significance of capital raised for interim closes.

Since the financial crisis, aggregate fundraising levels have remained subdued. Fund managers have experienced difficulty in raising capital from cautious investors that have been hit by declining asset values. There have been firms that have achieved considerable success, with some large and renowned fund managers achieving notable fund closes, while other funds with a niche, nimble and flexible approach have also been successful. For many other firms, however, fundraising has remained an extremely challenging prospect.

The increase in the number of funds holding interim closes, and the amount of capital raised through interim closes, suggests a renewed, albeit cautious, investor appetite for private real estate. Increasing numbers of firms have been able to raise sufficient capital to hold interim closes and begin to put their capital to work.

With a record number of funds on the road, and many investors still not planning new commitments, fundraising will continue to remain challenging for the rest of the year. There are signs of more momentum in the fundraising market, however, and with the majority of investors below their strategic target allocations to real estate, there is a significant amount of capital which could enter the asset class. Fund managers will have to work hard to stand out from the crowd, but for those able to do so, there are investors actively considering new opportunities and looking to invest in private real estate funds.

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