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Real estate funds taking longer to get to final close as competition heats up

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The real estate funds industry is alive and well from an asset raising perspective. In 2012, private RE funds closed with USD72 billion in committed institutional assets. By 2014, that number had increased by 45 per cent, according to leading alternative asset data provider, Preqin. 

While this is encouraging, the reality is that for most RE managers, the playing field has become extremely competitive as more players enter the arena to compete for a share of the assets.

Institutional investors favour the big global names in real estate who are attracting the lion’s share of assets, in a similar fashion to what has happened in the hedge fund space. The net result is that the average RE fund manager is taking longer to get to a final close. 

Preqin’s data shows that whereas the average time taken to get to final close in 2013 was 16.3 months, this year so far, the average time has risen to 19.8 months; already up on the 19.5 months for the whole of 2014. 

Due to the natural bias towards larger managers, a barbell effect is taking place. Thanks to their size and reputation, the number of managers who are getting to final close within six months has nearly doubled from 10 per cent in 2014 to 18 per cent YTD. At the same time, the percentage of smaller managers getting to final close has risen from 31 per cent to 35 per cent. 

Not that these dynamics are really much of a surprise. As Andrew Moylan, head of Real Estate Products, notes: “Over the last couple of years the fund raising environment has become increasingly busy and competitive. At the same time, the bigger managers in real estate have been hovering up more and more of the investment capital. What that means is that for the average RE fund manager, it’s increasingly tough to secure commitments and get to the first close.”

Although there has been a clear increase in funds closing in less than six months, the proportion of funds (28 per cent) reaching final close in under one year is actually the lowest its been since 2010, underscoring just how competitive the fundraising environment has become. 

This can partly be explained by the fact that institutional investors have become more diligent than ever in analysing real estate opportunities and how to allocate their capital. Managers with a long, solid track record and proven pedigree are simply better placed to succeed. 

Lone Star Real Estate, for example, completed a first and final close for Lone Star Real Estate Fund IV this April with combined capital commitments of USD5.8 billion. 

That’s an impressive result and nigh-on impossible for a mid-sized fund manager to compete with. 

According to Preqin’s research, the average time spent on the road fund raising by the 10 largest real estate managers (based on amount of capital raised in the last decade) since 2013 is 14.7 months. Since 2013, although the number of fund launches has remained similar – 428 funds through July 2013 compared to 425 through July 2015 – the aggregate target capital of RE funds has fallen from USD153 billion to USD149 billion. This has increased the amount of time on the road for the next 40 RE managers, according to Preqin’s classification, to 19.2 months. 

What this tells us is that smaller managers are spending more capital and more time on the fund raising path, all the while missing out on potential investment opportunities. 

Moylan says that the largest managers have actually changed the way they fund raise:

“Some of them will host a group session for a number of their investors and try and get everyone signed up in one fell swoop. For smaller managers, it’s becoming a longer process. This diverts from their main role which is, after all, to invest capital and find the best opportunities.”

This shouldn’t detract from the capabilities for small and mid-sized fund managers to stand out, capture the attention of institutional investors, and get to a final close. They just need to appreciate that it will take a little longer. 

What smaller managers have in their advantage is that they’re not directly competing with the Blackstones of the world to do large-scale deals. Those who focus their investment strategy on specific areas of the global real estate market can be attractive to investors e.g. having expertise in German logistics. 

“It all comes down to being able to provide something unique,” says Moylan. “If you can prove that you have a strong track record in German logistics, to continue the example, you’re going to be well positioned. Where mid-sized managers potentially struggle is by not offering something specific but rather a more diversified European strategy.” In other words, taking a ‘jack of all trades’ approach as opposed to being a master of one.

Indeed, Preqin’s research was quite revealing when it came to analysing the proportion of closed-end RE funds that reach their target size by first close. Whilst 59 per cent of funds reach their target within six months of a first close, some 63 per cent of funds are still able to reach their target even after persevering for 25 months or more. Not that there are going to be many managers that do this, but it’s a revealing statistic nonetheless, and one that should give hope to managers who feel they are facing an uphill challenge.

“We were quite interested by that statistic, it wasn’t what we expected,” notes Moylan. “The market would suggest that you need to get a strong first close and go on from there whereas the data shows that even those managers who are taking up to two years are still doing well at hitting their target. That is encouraging. It’s not like if you don’t get to first close in six months you’re going to automatically fail to launch; you can still be successful.”

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