COMMENT: Down but not out

Earlier this week, PERE unveiled this year’s PERE 50, our annual ranking of the largest private equity real estate firms in the world in terms of fundraising activity. Among the more notable changes was the disappearance of the real estate investment arms of investment banks Morgan Stanley and Goldman Sachs, both of which formerly were high-ranking mainstays of the fundraising survey but now have completely fallen out of the top 50 firms.

Much of the decline of Morgan Stanley and Goldman in the PERE 50 can be attributed to the elimination of funds raised prior to the fall of Lehman Brothers and the start of the global financial crisis, as those investment vehicles now fall outside the ranking’s five-year fundraising window. However, their decline also is due to the new realities of fundraising in a post-crisis world, including reduced investor interest in blind-pool structures, smaller fund sizes on average and, most notably, new regulations and restrictions on financial institutions.

Of particular concern for Goldman and Morgan Stanley has been the Volcker Rule. Part of the 2010 Dodd-Frank Act, the rule limits a bank’s own investment in a fund it manages to no more than 3 percent of the total equity. Given the desire of LPs to invest with managers that have “skin in the game” and a strong alignment of interest, this becomes a problematic talking point when on the fundraising trail.

Whether or not that has played a part, Morgan Stanley has not announced any significant equity closings for its value-added or opportunistic strategies – those counted in PERE’s ranking – since its seventh global opportunity fund, which closed in 2008. Outside the parameters of the PERE 50, however, the firm has been active on behalf of its global core real estate platform, which has grown from $5.5 billion at the end of 2009 to $10 billion at the end of last year, according to SEC filings.

Meanwhile, Goldman has shifted its strategy to focus primarily on debt vehicles, which are exempt from Volcker restrictions but unfortunately also are not counted towards this ranking. In fact, the bank announced just this week that it has wrapped up its latest real estate debt fund, raising a hefty $1.8 billion to invest in senior and mezzanine loans backed by high-quality real estate. Factor in an equal amount of leverage and $600 million from Goldman’s own balance sheet, and the firm has more than $4 billion to deploy. That is a far cry from not raising any capital to invest in real estate, which Goldman’s diminished ranking might suggest.

In addition to excluding core strategies and debt funds, the PERE 50 does not include capital raised for club funds, separate accounts or joint ventures. That would explain the notable declines by LaSalle Investment Management and CBRE Global Investors, both of which have put a significant emphasis on building up their separate account business.

Without a doubt, the PERE 50 is a valuable tool for determining the biggest raisers of real estate capital over the past five years. However, it does not provide a complete picture of a firm’s activity on behalf of its LP clients. So, while a firm like Goldman might be down or even outside the PERE 50 ranking, that does not mean that it is out of the capital-raising game completely.