Real Estate Funds of Funds Face Ongoing Difficulties - August 2014

by Luke Alexander

  • 07 Aug 2014
  • RE

Real estate funds of funds are an important component of the private real estate universe. They are both a significant source of capital for private real estate fund managers and a diverse route to market for institutional investors, as they give exposure to a wider range of geographies and strategies. There have been periodic surges in capital raising for real estate fund of funds since the financial crisis in 2008, and overall, fundraising for these vehicles has seen a decline. In 2011, 12 funds of funds raised an aggregate $2.4bn, while in 2012, six vehicles secured $4.3bn in equity, reaching pre-2008 levels. Three funds have been able to close so far in 2014, raising an aggregate $718mn, alluding to the ongoing difficulties faced by fund of funds managers. One of the largest fund of funds vehicles to have closed since 2007 is Partners Group Global Real Estate 2011, managed by Partners Group. The fund raised $800mn and targets real estate opportunities on a global basis. 

Currently, there are 17 real estate fund of funds vehicles on the road; 13 of which are targeting underlying funds focused on North America, while the remaining four vehicles are targeting funds focused on European real estate. Fifty-three percent of funds on the road are being raised by fund managers headquartered in North America. The remaining 47% are sponsored by real estate fund of funds managers based in Europe. 

The largest fund of funds vehicles on the road is Partners Group Global Real Estate 2013, which is looking to invest in underlying real estate funds focused on Europe. The vehicle, managed by Partners Group is targeting $1bn in capital. The second largest fund of funds in market is Siguler Guff Distressed Real Estate Opportunities Fund II, which is targeting $750mn and will invest in funds targeting US real estate assets. 

Real estate fund of funds managers have a stronger preference for higher risk/return strategies compared to other investors. Eighty-three percent of fund of funds managers have a preference for value added vehicles, whereas 56% of all other investors favour the strategy. Ninety percent of real estate fund of funds managers have an interest in opportunistic strategies compared to only 51% of all other investors. Core strategies are least favoured by fund of funds managers, with only 12% citing an interest in this low-risk strategy, compared to 37% of other investors. The greater appetite among fund of funds managers for higher-risk strategies compared to other investors is an indication of their tendency to seek greater returns from their investments.

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