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Top 20 Real Estate Fund Managers: The Importance of Manager Experience – June 2014 (Part II)

by Olivia Harmsworth

  • 19 Jun 2014
  • RE

A key reason that many of the top 20 fund managers have been so successful in securing investor capital is a proven track record of strong performance, which is a crucial factor in manager selection for many investors. Fifty-seven percent of funds managed by these firms are ranked as top or second quartile, while only 20% are ranked as bottom quartile. This suggests that in many cases it has been a strong performance track record that has enabled these firms to be successful in raising capital during the very tough fundraising market of recent years.

Preqin has developed an additional method for measuring private equity real estate performance across all vintage years, the PrEQIn Real Estate Index, which captures in an index the returns earned by investors on average in their real estate portfolios, based on the actual amount of money invested in real estate partnerships. The PrEQIn Real Estate Index for the top 20 managers compared to all other managers, re-based to 100 as of December 2000, demonstrates similar patterns of growth until 2007, when the index of top 20 managers begins to outperform other managers. Both indices declined significantly in 2008 and 2009 but since this point, the PrEQIn Real Estate Index for the top 20 managers has demonstrated considerable growth, standing at 313.3 as of September 2013; comparatively, the index for other managers stands at 189.6, indicating the overall outperformance of funds managed by the top 20 managers compared to other managers over time. Again this demonstrates that the strong performance of these firms goes a long way to explaining their recent fundraising successes.

Looking ahead, the private real estate fund market is likely to see further division between more and less experienced managers, as investors continue to look for managers with a proven track record and prior fundraising experience. A significant 42% of capital targeted by funds on the road is by managers which have previously raised six or more funds, despite only accounting for 23% of the number of funds in market. As demonstrated above, funds raised by the top 20 managers (by capital raised since 2009) account for a considerable proportion of global dry powder, and with many of these funds closing on or above target, dry powder among these managers is likely to continue to grow. As a consequence, these managers are likely to play an important role in private real estate investment going forward as they look to put their available capital to work.

Nonetheless, many less experienced managers have been able to attract investor capital; 21% of funds closed in 2013 were raised by first-time managers, with 63% of these closing on or above their target size. When looking at the 10 largest funds in market by target size, it can be seen that the top three are managed by firms which have previously raised 10 or more funds. However, first-time manager AgFe is currently raising AgFe Senior Debt Fund, with a target size of £1bn, while Aalto Invest is targeting £1.5bn for Aalto Commercial Real Estate Loan Programme, its second real estate offering. Many investors will consider investing with emerging managers, and new firms that can offer a compelling investment opportunity and demonstrate they have a strong and stable team, as well as being able to effectively articulate their investment strategy to potential investors, have the potential to be very successful in the current market.

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