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The Decline of Real Estate Funds of Funds – March 2015

by Charles Wood

  • 23 Mar 2015
  • RE

As detailed in the March 2015 edition of Preqin Real Estate Spotlight, real estate fund of funds managers play a significant role in the private real estate arena. The wide spectrum of geographies and strategies that they provide exposure to has made them an attractive investment route for institutional investors, while private real estate fund managers value them as an important source of capital. An analysis of the activity of real estate fund of funds managers can give investors insight into the market’s more attractive opportunities. 

Fundraising for fund of funds vehicles has been in steady decline since 2007, as can be seen in the chart below, with the number of funds closed dropping 70% between 2007 and 2014. There have been instances of anomalous growth in capital raising for real estate funds of funds, but overall fundraising for this strategy has dropped considerably. Aggregate capital raised by funds of funds has dropped from $4.9bn in 2007 to $0.9bn in 2014, with a slight pickup in 2012 when eight funds raised $4.3bn. Siguler Guff Distressed Real Estate Opportunities Fund II is the only fund which has been able to close so far in 2015, further demonstrating the challenges still facing fund of funds managers. Managed by US-based Siguler Guff, the fund seeks exposure to debt, distressed, and opportunistic strategies in the US and Europe. 

Preqin’s Real Estate Online service currently shows that there are 13 real estate fund of funds vehicles on the road. North America is the focus for 85% of these funds, with the remaining 15% targeting Europe. Of the 13 funds in market, nine funds are being raised by real estate fund of funds managers headquartered in North America. The remaining four are being raised by real estate fund of funds managers based in Switzerland. 

The largest fund of funds in market is Partners Group Global Real Estate 2013, which is looking to invest in real estate funds, secondary transactions and direct property deals on a global scale. Managed by Swiss-based Partners Group, the fund is targeting $1bn. Like Partners Group’s offering, the second largest fund of funds in market has a global geographic focus. AIP Phoenix Global Real Estate Fund II is managed by Morgan Stanley Alternative Investment Partners and is targeting $500mn. 

With a preference for higher risk/return strategies, real estate fund of funds managers have set themselves apart from more cautious investors in the asset class. Eighty-eight percent of real estate fund of funds managers list value added as a strategy preference. Similarly, 87% have an appetite for opportunistic strategies. Only 49% will pursue core strategies, demonstrating a preference for higher returns among fund of funds managers. Sixty percent of fund of funds managers will invest in first-time funds, compared to just 16% of other real estate investors, further demonstrating this appetite for higher risk/return strategies. An explanation as to why fund of funds managers are chasing higher returns could be to negate the double layering of management fees, the primary downside when investing in a fund of funds vehicle. 

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