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Emerging real estate managers


Preqin reports that the private real estate fundraising environment for emerging managers (defined by Preqin as first- or second-time fund managers) seems especially daunting as of late.

In an extremely competitive fundraising market the lack of an established track record obstructs new firms from securing institutional investor commitments. Larger, more experienced real estate firms have been gaining ever larger proportions of fundraising. But has this been at the expense of newer entrants to the marketplace?

Emerging manager fundraising

Fundraising by emerging private real estate managers has struggled to emulate its pre-crisis peak of 174 funds reaching a final close for USD40 billion in capital commitments. The downturn led to year-on-year declines in aggregate capital raised before recovering in 2011, when a post-crisis peak of USD25 billion was raised from 121 funds. As it stands, a similar amount of capital to the five-year average should be raised by emerging managers in 2015, despite a continued decline in the number of funds closed. 

However, there are currently 211 private real estate funds in market managed by emerging firms seeking USD46.9 billion in capital commitments, which could elevate the 2015 fundraising total closer to the post-crisis peak of USD25 billion in 2011.

Although the average final close size of vehicles raised by emerging managers increased to USD318 million for funds closed in 2014, it remained just 60 per cent the average close size of all other funds. This year the gap has further widened because the average close size for all other funds has hugely increased to USD894 million, while the average close size for emerging funds (USD282 million) lies below the 2014’s average.

The proportion of total capital raised for private real estate vehicles by emerging managers reached a peak of 37 per cent in 2011 but since then it has continually declined and now stands at a low of 16 per cent. Moreover, real estate funds raised by emerging managers are not achieving the same level of success in hitting fundraising targets compared with other private real estate funds. Half of the funds raised by emerging managers that closed in 2014 and 2015 YTD failed to achieve their target size while only 39 per cent of all other funds did the same. Meanwhile, at the extremities, similar proportions of both types of fund secured more than 125 per cent of their target, but 11 per cent of emerging managers failed to make even 50 per cent of their target.

Geographic and strategic preferences

The past few years have seen North America-focused funds lead the way in total emerging manager capital invested, with the proportion standing at 62 per cent in 2015 YTD. Such data marks a return to the market norm given North America’s exposure to emerging manager’s investments had been reduced to 52 per cent in 2014. In contrast, Europe-focused funds represented a larger-than-usual 39 per cent share of the emerging managers market. Elsewhere, Asia-focused vehicles tripled their proportion in emerging manager capital invested to 15 per cent in 2015 YTD. 

Higher risk strategies such as opportunistic and value added funds have accounted for 64 per cent of funds closed by emerging managers in 2015 so far, in line with their more experienced peers. Interestingly, with the advent of private debt in institutional real estate investor portfolios, 2014 saw nearly half (46 per cent) of the aggregate capital raised by new firms primarily targeting real estate debt opportunities, well above the historical average (15 per cent), despite only representing 17 per cent of emerging manager funds reaching a final close. 

Long road to capital

While it is certainly the case that the largest managers can secure billions of dollars in capital relatively quickly – as exemplified by Blackstone Real Estate Partners VIII raising USD14.5 billion in four months – this is not standard for most real estate firms, irrespective of experience. 

However, for funds closed in 2014 and 2015 there has been a divergence in the time spent marketing vehicles. Experienced managers who closed funds in this period were on the road for an average of 18.4 months; emerging managers have spent two more months in market, on average. Furthermore, 43 per cent percent of vehicles launched by experienced managers in 2013 have reached a final close, in contrast to 33 per cent of emerging managers. Twelve per cent of emerging managers have had to abandon funds with only 3 per cent of all other funds failing in this manner. 

Performance of first-time funds

Funds raised by emerging managers have outperformed all other real estate funds across all vintage years, barring the more recent 2010 and 2012 vintages. Emerging manager funds of vintage 2011 have a median net IRR of 18.1 per cent, a high in real estate performance regardless of experience or vintage year.

Thirty-three percent of funds raised by emerging managers are top-quartile performers and 56 per cent achieve returns above the median benchmark for real estate funds of the same vintage year. This may be because newer managers are typically smaller and may therefore be more nimble, or because the new team is eager to prove their worth.

Institutional investor appetite

Many private real estate investors are increasingly looking for managers with a strong track record, resulting in almost two-thirds of the private real estate investor population stating that they will not invest in first-time funds, a figure that has remained consistent since 2012. As such, attracting investor capital is often perceived as the biggest challenge faced by emerging managers. However, there is a clear correlation between appetite for first-time funds and institutional investor assets under management (AUM). Ninety-one percent of investors with AUM of less than USD1 billion will not invest in first-time private real estate funds, while 41 per cent of investors with over USD50 billion in AUM will invest in new fund managers. 

Outlook

The trend among institutional investors of committing more capital to fewer GP relationships has made the fundraising journey a perilous one, especially for emerging managers. Raising a first- or second-time fund continues to be tricky, with a myriad of factors making the journey to final close a long and difficult process. More recently, the rising valuations of real estate assets could price out emerging managers, who on average raise less capital than their more experienced peers. To counter the crowded and competitive fundraising market, many new firms may instead look to build up a track record through separate accounts or by investing on a deal-by-deal basis, as opposed to bringing multi-investor funds to market.

Despite this, the performance of funds raised by newer infrastructure firms demonstrates how important it is for investors to consider the full range of funds available in the market. Identifying the best opportunities is extremely challenging, but those investors that can pick the best emerging managers have the potential to be rewarded. 

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