The fundraising environment for managers raising private real estate funds has remained particularly challenging in recent years, with funds taking an increasingly long time to reach a final close. While there has been a small decline in the number of private real estate funds on the road since July 2012, the fundraising market remains very overcrowded, with 429 funds in market targeting an aggregate $155bn. Considering the fact that over the last three years, private real estate funds reaching a final close raised an aggregate $161bn, fund managers on the road may find it difficult to reach a final close on target.
Amid fierce competition, fundraising has become a long process for many firms, with funds closing in 2012 spending an average of 17.6 months in market, almost double the time taken in 2007 (9.2 months). For funds that held a final close between 2007 and 2012, there has been a decline in the proportion of funds that closed within six months from 2010 to 2012, and an increase in the proportion of funds that took over 18 months to reach a final close. Only 10% of funds that achieved a final close in 2007 were in market for more than 18 months, but by 2012, this figure had risen to 44%.
While fundraising is now a long process for many firms, examining the time taken for funds to reach a first close shows fairly limited change in recent years and suggests that a degree of momentum is important when it comes to successfully raising funds. The majority of funds that held a final close between 2007-2012 did so having held a first close within 12 months; 91% of funds that held a final close in 2007 reached a first close within 12 months while 88% of funds that held a final close in 2012 achieved a first close within 12 months.
The proportion of funds on the road which have held an interim close has risen in recent years; 47% of funds in market have held at least one interim close, compared to 40% in March 2012 and 37% in March 2011. This suggests that there is more momentum in the fundraising market, with more managers able to secure enough capital to hold an interim close and begin investing. However, of the funds in market that are yet to hold an interim close, 57% have been fundraising for more than a year. Fundraising for these firms is likely to be particularly challenging given that the majority firms to close funds in recent years did so having held a first close within 12 months.