Is it possible to grow bored with a crisis even as it continues to unfold? If so, count me among the bored.
Let me clarify—the effects of the subprime meltdown and resulting credit crunch on private equity real estate may ultimately be a gripping spectacle, but the endless jawboning about what the longer-term effects will be is becoming tedious because the conclusion is always the same, namely, that it remains to be seen what the longer-term effects will be.
We know that the deal pace will slow, at least temporarily, and that leverage for deals will become more expensive and available in smaller doses.
What the mainstream press fails to understand about the alternative investment industry in general, and the private equity real estate industry in particular, is that the most important measure of the growth of the asset class is not any kind of leverage ratio, but the flow of capital from limited partners. General partners will find ways of closing deals if they have the equity capital. And all indications are that the supply of LP capital will, if not balloon next year, at least keep pace with the robust fundraising of recent years.
A common observation of the LP community is that many of these investors—especially the biggest pension plans—are like aircraft carriers in that they are mighty forces but can take a long time to change directions. It won't be until later this year that the boards of some of these investors will even evaluate whether they want to make changes to their real estate strategies in light of market conditions.
The most sophisticated among them are unlikely to make any drastic changes, as current allocation targets were presumably based on very long-term, multi-cycle views of real estate's place in the portfolio.
A drop in the stock market would have the most profound effect on LP real estate activity, as a pension with a 10 percent target allocation to the asset class may find itself suddenly overallocated if its overall portfolio contracts in value. But, crucially, when one door to the institutional investor firmament closes, another one opens.
For every limited partner that takes a breather committing new capital to private equity real estate, two new pockets of capital open up somewhere in the world. Witness the awakening of China's foreign currency reserve as a source of alternative investment capital, as well as the increased interest in alternatives from Mubadala, the Abu Dhabi Government strategic investment and development company. These are elephantine examples of a broader trend that will keep capital flowing into private equity real estate, and into innovative property investment around the world.
Enjoy the issue,