Is the market ready for another $20bn opportunity fund?

Brookfield Asset Management is aiming for rarefied air with its fourth flagship real estate fund.

Brookfield Asset Management’s Strategic Real Estate Partners IV is to be the first private real estate opportunity fund with a fundraising target north of $10 billion since the pandemic began. The fund was launched in April with a target of $17 billion and has no hard cap.

If the fundraising is successful, it would be the second largest real estate fund ever raised, behind only Blackstone Real Estate Partners IX, which closed on $21 billion in 2019. How it fares will speak volumes about the health of the capital raising market and Brookfield’s standing in it, capital raisers familiar with the fund tell PERE.

Covid-19 shutdowns halted in-person fundraising and threw real estate markets around the world into uncertainty. As a result, 2020 was a quiet year for capital commitments. Private real estate managers closed on $110 billion for closed-end funds, down 30 percent from the prior year and 40 percent from the cycle peak in 2015, according to PERE data. Mega-funds – those that attract $5 billion or more – and vehicles with opportunistic strategies had their worst showing since 2017.

After a paltry year, Matthew Casper, partner at New York-based advisory PJT Park Hill, expects a surge in pent-up demand to hit the market in 2021. With its place secured as the second-biggest firm in the private real estate sector, Casper says Brookfield is well-positioned to take advantage of that resurgence.

“I do believe the market is ready for it, and I believe they will be successful,” he tells PERE. “We continue to be in a consolidation phase, particularly around opportunity fund managers that have great track records over multiple cycles that have proven capabilities at the asset level and a differentiated strategy. The size alone is a differentiator.”

Yet, it is debatable whether Brookfield fits that description. It managed one-off opportunity funds as far back as 2004, but the Toronto-based manager did not launch its first BSREP fund until 2011, meaning the series has only operated through one growth cycle. This makes the 18 percent gross internal rate of return Brookfield claims for its flagship funds less substantial than the 17 percent net IRR of Blackstone’s BREP series, which dates back to 1994 another capital raiser tells PERE.

Sourcing capital

Traditionally, Brookfield has contributed a large sum to each of its funds, putting up a quarter or more of the total capital. It has committed more than $1 billion to each of its BSREP funds, including $3.75 billion for BSREP III.

Most of the capital has come from its Brookfield Property Partners arm. But, earlier this year, Brookfield Asset Management announced its intention to privatize the platform, which trades under the ticker BPY.

A source familiar with the fund said Brookfield Asset Management, the parent company, would still participate in BSREP IV. But it is unclear how the take-private of BPY will impact the capitalization of its fund investment. During the firm’s first-quarter earnings call, chief executive Bruce Flatt said it would no longer target a 25 percent allocation, given the size of the vehicle. “That’s a very large commitment from us,” he said. “So, it’s possible going forward that the number goes down on a percentage basis, but it will always be a very absolute committed amount which is large.”

Flatt: as funds grow bigger, do not expect 25 percent participation from Brookfield.

Regardless of how it produces its share of the fund, Casper said Brookfield should have no problem raising outside capital from the long list of sovereign wealth funds and pension investors that have backed its previous funds.

“The easiest capital to raise comes from leaning on existing investors and having them do more with you,” Casper said. “Many investors continue to be underweight to real estate. But, even if they are at capacity, the recycling element allows for renewed commitments. The sponsor can send $2 back [in returns] and ask for $1 [for their next fund]. Those existing relationships are very powerful.”

Investment rebound

Fund closings during the first quarter of this year continued to lag recent years. Total volume from January through March was $33.2 billion, according to PERE data, while the average first quarter between 2015 and 2020 saw more than $40 billion of closures.

However, there is hope for Brookfield. Along with rising optimism about the economy driven by successful vaccination efforts, the first few months of 2021 have brought some major milestones for large fundraisers.

While final closes were fewer in number, vehicles that did make it across the finish line last quarter tended to be larger. The 10 biggest closings were all for $1 billion dollars or more and three of the top five were opportunity funds: Oaktree Real Estate Opportunities VIII on $4.7 billion, Cerberus Institutional Real Estate Partners V on $2.8 billion and Ares US Real Estate Opportunities Fund III on $1.7 billion.

If investors continue to consolidate their capital with the top opportunistic fund managers, Brookfield could be well-positioned to make history as only the second manager to raise $20 billion for a single fund.