Friday Letter A big year for fundraising

The year won’t end for two more weeks, but PERE can safely deliver this bit of news – 2007 was the biggest fundraising year yet for private equity real estate. 

As reported in the December 2007/January 2008 issue of our magazine, private equity real estate fund managers around the world raised at least $65 billion in capital commitments from limited partners during the year just passed. As news of year-end fund closes trickle in over the next month, expect the 2007 total to rise.

The $65 billion raised is roughly 20 percent more than the $54 billion raised in 2006. During 2005 private equity real estate funds – defined as value-add and opportunity real estate private partnerships – raised roughly $34 billion.

“For 2007, you’ve just had a number of very positive circumstances coming together that have influenced the fundraising market,” Susan Stupin, a managing director at New York-based The Prescott Group, told PERE. “Real estate as an asset class has been drawing increased allocations from a wide variety of investor groups internationally, including institutions, private investors, pension funds, and others, who have either wanted to put more money to work in the real estate asset class or to further diversify their real estate holdings, in many cases in emerging markets.”

The 2007 figures include $10 billion raised for Blackstone Real Estate Partners VI, to date the largest private equity real estate fund ever raised. That vehicle has not yet announced a final closing. The year also saw the closing of Morgan Stanley Real Estate’s sixth fund, which drew $8 billion in commitments.

While dealmakers everywhere are struggling with frozen loan markets and reluctant sellers, it is clear that institutional investors everywhere remain bullish about real estate as a long-term asset class, along with other “alternative” investments. Next week, the California Public Employees’ Retirement System meets to consider a staff recommendation that the $255 billion pension up its allocation to real estate to 10 percent from the current 8 percent. Private equity is slated to go to 10 percent from 6 percent.

Who benefits from these allocation increases? Disproportionately, the big guys. Large firms like Blackstone and Morgan Stanley are outfitted to manage large funds, which is where CalPERS and other huge institutions want to deploy their capital. The big firms are also broadening a global footprint, which is highly appealing to investors who need to build geographically diversified real estate portfolios.

But the rising tide of capital commitments will lift most firms with strong track records, and lead to the creation of new firms, many of them spin-outs from existing ones.

The only thing that would prevent 2008 from being an even bigger fundraising year for private equity real estate would be a downturn not in property values but in the stock market. A significant drop in stock valuations would have the effect of increasing the real estate slice in the institutional portfolio pies, which would force these investors to slow the pace of new commitments or risk ending up over-allocated.

In fact, a dip in property values is the kind of thing that should put smiles on the faces of investors with $65 billion to spend.