Raising money for a real estate fund has been hard graft of late, just ask any GP currently touring the offices of investors. They will tell you limited partners are taking longer to commit, if they commit at all, with many reducing the size of their investments as they take stock of declining distributions and falling portfolio values.
Some funds, including big names such as Morgan Stanley Real Estate, have been forced to delay their final closes as LPs ask for more time.
It should come as no surprise therefore that fundraising in 2008 has failed to live up to the peaks of last year.
According to proprietary data from PERE magazine, just $57 billion was raised in value-added and opportunistic real estate vehicles to 25 November, 2008 compared to $85 billion during the same period in 2007 and $60 billion in 2006.
And for the first time, Asia was the investment strategy of choice for investors and their GPs.
In 2007, only 19 percent of all real estate vehicles closed were targeting Asia-focused investments. Twelve months later that has increased by more than two-thirds, with 28 percent of all funds closed during 2008 targeting Asia and the rest of the world strategies – a total of $16.2 billion.
During the summer, the industry saw the mega Asia funds of MGPA, LaSalle Investment Management and Merrill Lynch close their vehicles, with MGPA raising the largest Asia-focused real estate fund ever, MPGA Asia III, on $3.9 billion.
These funds came at a time when institutional investors were increasing their real estate allocations to emerging markets, particularly China and India. As one Indian fund manager said this week: “The opportunities are fantastic, but the problems surrounding it can also be immense.”
Now as the industry looks to 2009, what will the fundraising environment look like? LPs are still keen to diversify their real estate portfolios, notably their geographic diversity, but, as they struggle with the so-called denominator effect, will they have the ability to respond to the opportunity?
The distress set to emerge in mature markets, such as the US, UK and western Europe, will also tempt many LPs with capital to deploy, as they try to ensure they take part in what is generally considered to be the investment opportunity of a generation.
North and Latin American strategies dominate the landscape for funds currently in market, with 34 percent of all capital being raised, a total of $44.5 billion, focused on the two regions, according to the data. That compares to just 23 percent of all funds currently in market targeting Asia and the Middle East.
We should therefore expect to see North and Latin America regain the fundraising initiative in 2009. Provided, that is, LPs open their wallets first.
Final fundraising figures for value-added and opportunistic private equity real estate funds will be published in the February edition of PERE magazine.