In this first extract from March 2016’s Preqin Special Report: Real Estate Co-Investment Outlook, we examine some of the results of our survey of 75 real estate firms in H2 2015, discussing fund managers’ views as well as the perceived benefits and disadvantages of co-investments.
Discussions surrounding the disintermediation of real estate are becoming more common, and increasing numbers of institutional investors are exploring alternatives to pooled fund commitments. Reflecting this trend, the majority (70%) of real estate fund managers surveyed feel that it is important to offer potential investors co-investment rights when seeking new commitments, and that this increases the chances of a successful fundraise. Given this, it is perhaps unsurprising that 57% of fund managers expect to offer more co-investment opportunities to investors in 2016 than they did in 2015, while just 2% expect to offer fewer.
We asked real estate fund managers what they perceive to be the positives and negatives of offering LPs co-investment rights. Just 6% of respondents stated that there are no benefits in offering LPs co-investment rights, as seen in the chart above. The survey revealed that the most important benefit for fund managers is that they help to build stronger relationships with their investors, with co-investments likely to help establish long-term partnerships; access to additional capital is also an important consideration for a large proportion of firms.
Co-investments do present fund managers with challenges, however, with the additional costs associated with reporting or setting up special purpose vehicles named by 44% of firms as a downside. The potential for a deal to be delayed (cited by 41% of respondents), the problems associated with the timing or rights of co-investors (39%) and the loss of control of an investment (39%) were also named as important considerations.