The average length of time taken for a private real estate fund to reach a first or final close gives an insight into the overall conditions of the current fundraising market, as an indicator of investor appetite for the asset class. Of funds that reached a final close in 2010 or 2011, 96% of funds achieved a first close within 12 months of launch, with 48% holding an interim close in six months or less. Just 4% of these funds failed to achieve a first close within 12 months, holding a first close between 13 and 18 months instead.
How does this correspond to the current situation facing funds on the road? Of all the funds currently raising capital, 71% have been in market for 18 months or less. 46% of funds that have held at least one interim close have been in market for more than 18 months, but have received commitments to hold a close and begin investing capital.
While this is promising, 19% of private real estate funds that have yet to hold an interim close have been in market for longer than 18 months. The prospects for fundraising for this segment of the industry look extremely challenging, given that most funds to reach a final close in 2010 or 2011 did so having held a first close within 12 months. It is possible that this cross-section could well become candidates for placing funds on hold, or even abandoning funds altogether, as they struggle to attract investor capital.
Further illustration of the competitive nature of the fundraising market is provided by an analysis of the length of time taken by funds to reach a final close. Of real estate funds to close in 2010, 59% spent at least 13 months in market, increasing to 67% of funds to close between January and October 2011. In 2010, 43% of funds closed did so after being in market for at least 19 months; however for funds closed in 2011 this figure declined to 29%, which suggests an improvement in the market over the past 12 months.
Smaller funds tend to spend less time in market, with 71% of funds that raised less than $500mn in 2010 or 2011 holding a final close within 18 months of launch, and of these funds 23% reached a final close in less than six months. As might be expected given the amount of capital sought in a tough fundraising environment, funds that closed on $1bn or more typically spent longer time in market. Indeed, half of all funds that raised $1bn or more were in market for over two years attempting to attract capital from investors. Despite this, there were some real estate fund managers that were able to raise substantial amounts of capital relatively quickly, with 20% of funds raising $1bn or more in 12 months or less.