As documented in the 2013 Preqin Investor Network Global Alternatives Report, real estate fund of funds managers are influential investors in the private real estate market. The significant resources of these firms are required for implementing the necessary research and due diligence on potential investments, meaning that they are a particularly sophisticated and specialized group of investors. Analyzing the investment preferences of these managers can provide investors with a good indication of where the best opportunities reside in the market.
All real estate funds of funds that closed between 2011 and April 2013 targeted funds with an opportunistic strategy. However, this fund type is being targeted by less than three-quarters (73%) of real estate funds of funds that are currently in market. A higher proportion of funds of funds in market are favouring value added, debt and distressed strategies than those funds of funds that closed in the period 2011 to April 2013, with value added the most sought after strategy for the real estate funds of funds in market. Underlying debt funds are more prominent as decreasing availability of bank financing has offered real estate firms the opportunity to address the demand for funding. Real estate fund of funds managers are often able to adapt to market changes promptly, shifting strategy to capitalize on market movements. Accessing funds of funds gives investors the opportunity to tap into the relative flexibility funds of funds can enjoy.
Real estate funds of funds in market are more likely to invest in North America and Asia compared to vehicles that closed in 2011-April 2013. Appetite for Europe-focused funds has decreased among real estate funds of funds in market, with only 23% of funds of funds on the road targeting Europe in comparison to 40% of funds of funds that closed between 2011 and April 2013. Again, this is partly a result of these multi-managers altering their investment focus to target the regions they believe are presenting the best investment opportunities.
A significant 80% of real estate fund of funds managers are willing to commit to first-time funds and a further 2% will invest with spin-off teams only. In contrast, only 16% of institutional investors will commit to first-time funds, and a significant 65% are not willing to commit to first-time funds at all. Funds of funds as multi-managers can afford the associated greater risk of investing in fund managers raising their first private real estate vehicle, and can take advantage of more favourable fund terms. Investors not willing or able to take such risk can capitalize on first-time funds via fund of funds managers.