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Private Real Estate Fundraising; Winners and Losers?

by Farhaz Miah

  • 11 Nov 2011
  • RE

The private real estate fundraising process has become more difficult in the aftermath of the financial crisis, with an increasing number of real estate funds vying for a share of a comparatively diminished pool of capital. There are currently 440 private real estate funds in market targeting an aggregate $151bn; over three times the amount of capital that was raised in 2010. This suggests that the fundraising climate remains highly competitive and crowded, compounded by continued investor caution. Within this universe of managers seeking capital, divergence in fundraising performance has consequently increased.

Despite this, there are signs emerging of an improving overall fundraising environment. The total length of time spent in market by real estate funds that achieved a final close in January-October 2011 has decreased when compared to funds closed in 2010. Furthermore, there have been fewer funds abandoned or placed on hold in 2011 than in previous years. The ability of funds to exceed their fundraising targets, with almost 50% of funds achieving or exceeding targets in 2011, also suggests more favourable conditions for those real estate managers that are able to position themselves correctly.

Although there have been signs of improvement, there are signs of divergence within the real estate fundraising market. Funds targeting smaller amounts of institutional capital, usually specialists in the sectors or geographies they operate within, seemingly spend a shorter time in market, with 71% of funds that raised less than $500mn in 2010 or 2011 holding a final close within 18 months. In contrast, a significantly lower 57% of funds that raised between $500-999mn in 2010 and 2011 held a final close within an 18 month period. At the other end of the spectrum, some of the largest, brand-name firms have shown the ability to raise very large funds during a difficult fundraising period. Nevertheless, achieving fundraising success will continue to be difficult for a significant number of firms and it seems likely that several will be forced to abandon their fundraising efforts. Firms will need a clear strategy to avoid succumbing to these challenges, as investors remain cautious in committing capital to the asset class.

Although many investors are actively seeking opportunities and conducting due diligence, a sizeable proportion will not make any commitments in the coming months. The fundraising environment is set to remain challenging in the months ahead, as external macroeconomic and regulatory changes cloud investor intentions, and with an increasing number of real estate vehicles in market seeking capital, some managers will continue to face tough choices regarding the prospects of their funds.

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