Following on from Part 1 of this blog series, recent years have seen a significant number of funds meeting or exceeding their fundraising targets, a reversal of the trend observed between 2007 and 2009 when there was a steep increase in the proportion of funds closing below target. Half of all funds that closed in Q1 2013 exceeded their target size. Although this can partly be explained by fund managers lowering their fundraising expectations, this nonetheless suggests that there has been an improvement in the fundraising climate.
Performance of previous funds appears to have a significant impact on fundraising success. Of the funds closing on or above target in the period 2011 – March 2013, 63% were follow-up offerings to a top quartile predecessor fund, while just 14% had predecessor funds ranked as third or bottom quartile. It is interesting to note that, of the funds that closed below target, a significant 47% still had top quartile predecessor vehicles. This shows that, given how challenging it is for firms to raise capital in the current market, it is generally the better performing managers that are successful.
Competition remains intense among fund managers raising capital. Although the results of Preqin’s H1 2013 Real Estate Investor Outlook study show that a greater proportion of investors expect to commit to private real estate in 2013 than those interviewed concerning their investment intentions for 2012, fundraising is likely to remain challenging. As funds are increasingly spending over 12 months on the road, with a significant proportion of funds in market having been fundraising for over 18 months, it is likely that fundraising for a large number of firms will be a long process. However, recent years have seen a number of funds reaching or exceeding their fundraising targets, indicating increasing momentum in the fundraising environment. Nonetheless, as investors are increasingly selective and often form fewer fund manager relationships, it is likely that the better performing fund managers will continue to attract larger levels of investor capital and may therefore take less time to reach a final close than those fund managers with bottom or third quartile predecessor funds.