Chasing the dollars

The fundraising market for private equity real estate vehicles has reached record-setting levels over the past two years, creating new challenges— and opportunities—for GPs, LPs and placement agents alike.

Despite all the problems facing the world's major airlines, at the very least, they still have the global private equity real estate industry.

Over the past several years, opportunity fund managers have traveled to the far corners of the earth not only to find investment opportunities, but also to raise investment capital. As the real estate market has grown more sophisticated—and more global—general partners are finding money from a greater and greater number of sources, both in their home countries and abroad. Real estate may be a local business, but fundraising no longer is— and fund managers are using that fact to their fullest advantage.

Mimicking their colleagues in the private equity community, private equity real estate firms are now raising the largest pools of capital on record. The Blackstone Group, thick in the throes of jockeying with KKR and Texas Pacific Group to break the $15 billion-plus barrier in their latest buyout vehicle, is also close to wrapping up the biggest opportunity fund ever on $5 billion. At the same time that global mega-funds are redefining the terms “global” and “mega,” a significant number of smaller vehicles are forming to focus on niche opportunities in the more developed markets as well as broader mandates in the emerging ones. And up and down the size, risk and geographic spectrums, institutional investors are looking to place more and more dollars—and euros, pounds, dirhams, rupees and so on—into real estate, driven by historically strong risk-adjusted returns and a dearth of compelling investment opportunities elsewhere.

Reflecting those dynamics, opportunistic vehicles raised approximately $34 billion last year according to figures compiled by Private Equity Real Estate, making for one of the most active fundraising markets on record. It's a trend that, at least in the short-term, seems likely to continue.

Real estate may be a local business, but fundraising no longer is. And fund managers are using that fact to their fullest advantage.

A recent survey of US institutional investors showed that approximately $60 billion of capital was going to be invested in real estate in 2006 with a significant amount of that capital going towards opportunistic investment vehicles. Thus far this year, opportunity fund managers have raised approximately $15 billion in capital while, waiting in the wings, 16 other vehicles are currently on the fundraising trail with targets equal to or greater than $1 billion.

In the pages that follow, our journalists examine the current state of the fundraising market and the dynamics shaping its development. We start by examining the prospects for first-time funds—those run by emerging managers, professionals spinning out of larger organizations or operating partners looking to tap institutional capital for the first time—to gauge whether the overall buoyancy in the sector is trickling down to the little guys. Later, we focus on the placement agent community and how their roles are shifting in today's market, both in terms of expertise and geographic breadth. We also turn our attention to the institutional investor community, gauging their views on a unique facet of today's market: the rapid pace with which GPs are deploying their capital and returning to the fundraising trail. And we talk with David Ferrero, director of real estate investment for Harvard Management Company, one of the most wellrespected institutional investors in the alternative asset sector.

The robust flow of capital into real estate over the past several years has certainly made it more difficult to find opportunistic investments. But given the amount of liquidity in all asset classes worldwide, it is difficult to predict when those capital flows will dry up. One fact, however, is less difficult to forecast: GPs, LPs and placement agents alike will continue to rack up frequent flyer miles in search of both opportunities and investors.

So keep your seatbelts fastened.