2021 Outlook: Cashflow will be king in North American fundraising

Park Madison Partners expects capital commitments to bounce back in 2021 but with a strong preference for certain strategies.

New capital commitments were scarce in 2020 as investors either stuck with existing managers or sat on the sidelines waiting for the dust to settle. But there were bright spots around income-oriented and tech-driven strategies, Nancy Lashine, founder and managing partner of Park Madison Partners, told PERE.

The New York-based capital advisor saw continued interest in North American vehicles focused on logistics and residential properties, which saw strong rent collections and the potential for near-term rent growth. Otherwise, innovation sectors such as life science labs, medical offices and data centers were the asset strategies of choice, said Lashine, who expects both trends to carry into 2021.

Lashine: there is pent-up demand among real estate investors.

“Investors want strategies that have to do with technology, and they want assets that have cashflow, because 40 to 50 percent of their portfolios were fixed-income investments that are no longer generating what they once were,” she said. “They are looking for alternatives and clearly real estate is a fixed-income substitute of choice.”

Total one-year returns through the end of the third quarter were down across sectors, according to the National Council of Real Estate Fiduciaries’ Property Index. Industrial and apartments sustained the least damage, with performance slipping just 3.3 and 3.2 percentage points, respectively, from the end of 2019.

Meanwhile, returns in office slipped 3.8 percentage points but dropped by 8.2 points in retail and plummeted by 26.4 points in hotels. But most of those declines were felt on the appreciation side, with income returns holding steady – save for hotels where they fell 7.5 percentage points.

But even at depressed levels, real estate returns still compare favorably to government bonds tied to benchmark interest rates, which were slashed from 1.25 percent to 0.25 percent in the US, 0.25 percent to 0.1 percent in the UK and 0.05 percent in the Eurozone to zero.

“If you’re a pension with a 6 or 7 percent actuarial rate or a foundation with a 5 percent pay out rate or a high-net-worth investor targeting 7 or 8 percent a year, you can’t do that as easily as you could when treasury rates were 4 percent,” Lashine said. “So, there’s this continual look to other assets for cashflow.”

Increasingly, that look has gravitated toward sector-specific open-end structures or closed-end funds with longer-term lives. Whereas closed-end lifecycles traditionally last seven years, Lashine said investors have shown a preference for 10-year terms that allows managers to target core-plus-type assets and pay out stabilized cashflow for three years. These longer-dated funds also help manages avoid selling into unfavorable markets.

However, while sector-specific, long-dated funds are in vogue, Lashine said traditional opportunistic funds still carry value for investors looking to capitalize on distress. “There will be plenty of interesting opportunities in distressed hotels and retail,” she said. “We’re not seeing them yet and we’ll probably see them on the credit side before we see them on the equity side, but it’s early days and it will be hard to raise a blind pool focused on those opportunities. It will happen more in pockets of opportunity funds.”

After one of the quietest fundraising years since the global financial crisis, with just $98.5 billion committed through the first three quarters of 2020, Lashine expects a surge of fund investments in 2021. “There is pent up demand,” she said. “Roughly two-thirds of investors did not fulfill their allocations this year.”