Both the number and aggregate target of $1 billion-plus funds on the road has declined significantly since September 2008, when 59 funds were targeting aggregate commitments of $125.7 billion. As of April 2011, $46.3 billion is being targeted by 24 funds with a fundraising target of $1 billion or more. The sizable decline in investor activity that occurred in late 2008 and through much of 2009 and 2010 meant that many of the funds which were on the road in September 2008 were abandoned or raised significantly less than their original target.
Despite what appears to be a trend towards smaller, more focused funds, several established firms did bring new funds to market between January and April 2011. Eight funds with a fundraising target of $1 billion or more have been launched, most notably Blackstone Real Estate Partners VII, which is targeting $10 billion. While fewer funds started fundraising between January and April 2011 than in the same period in 2010, the aggregate target of these funds, $34.7 billion, is significantly larger.
The launch of these large funds certainly points to a possible upturn in the fundraising market. These firms clearly feel that investor confidence is returning and that they will be able to secure commitments for their funds. However, while Preqin’s conversations with investors do indicate that they are more likely to make new commitments, fundraising will remain challenging given the number of funds on the road.
Manager selection remains important, and there is a great deal of variation between the best and worst performing funds. Some of the largest funds have been top performers, including offerings from Lone Star, Fortress and Beacon, which have produced net IRRs in excess of 30%. As uncertainty remains in the real estate market, institutional investors are looking for managers that can prove that they can create value. Large, brand-name firms that have been successful in the past will no doubt continue to be successful in the future as confidence returns to the asset class. For firms whose funds have not performed as well, raising capital in 2011 is likely to be far harder, as institutions increasingly look to funds with more focused strategies.