Investment in private real estate debt has evolved considerably in recent years, with many institutions becoming more at ease with the strategy and looking to include such funds within their portfolio. This growth in investor appetite has led to increasing numbers of fund managers launching debt offerings, with both new firms entering the private real estate fund market for the first time, and established firms launching their first debt-focused vehicles.
Funds targeting equity investments remain the mainstay of many investors in closed-end private real estate funds, with funds focusing on equity investments consistently accounting for the largest proportion of aggregate capital raised since 2009. However, funds focusing solely on equity investments account for a decreasing amount of capital raised, with 49% of capital raised by closed-end private real estate funds in 2013 accounted for by such funds, compared to 69% in 2009. Over this period, an increasing number of funds have included debt as a strategy alongside equity, with funds investing in both debt and equity increasing, from accounting for 19% of aggregate capital raised in 2009 to 38% in 2013. However, 2012 was a particularly poor year for debt-focused fundraising, with debt and equity funds accounting for 16% of capital raised and solely debt-focused funds accounting for just 7% of total capital.
Capital raised by primarily debt-focused funds decreased from a significant $13bn in 2011 to $5.6bn in 2012. However, 2013 saw capital raised for this strategy more than double to $12.2bn, and 2014 so far has already raised more than half of this capital, with $9bn raised from seven funds. As such, fundraising for debt-focused funds appears to be gaining momentum as investor confidence in the strategy increases, leading to increasing amounts of capital flowing into such funds.
Debt funds have had considerable success in reaching their equity targets in recent years, with 72% of primarily debt-focused funds closed in 2013 achieving 100% or more of their target size, and 17% raised 125% or more. This demonstrates that debt funds are having greater success than other funds, with 59% of funds focusing on other strategies which closed in 2013 achieving 100% or more of their target.
For debt funds closed in 2014 so far, 75% have reached or exceeded their target size, compared to 59% of all other funds. This is a significant increase in comparison to funds closed in 2011, when only 32% of debt-focused funds reached or exceeded their target size, reflecting the strong appetite among investors for the strategy.
Appetite among investors for real estate debt funds remains strong, despite minor fluctuations over the last 18 months. As of April 2014, 21% of investors included debt as a strategy within their fund searches, increasing from the 13% of investors which targeted the strategy six months ago, but similar to the levels seen in October 2012, when 22% of investors included the strategy within their fund searches.
The strong investor appetite for debt funds is likely to be driven by encouraging performance levels. Since December 2007, the real estate debt index which captures the average returns earned by investors in their portfolios based on the actual amount of money invested in private real estate partnerships, has outperformed both the value added and opportunistic indices, standing at 85.0 as of September 2013, compared to 58.9 and 69.0 for the value added and opportunistic indices.