Friday Letter Calm before the storm

The 2010 PERE 30 ranking produced little by the way of significant movement from last year’s list with large capital closings few and far between. But next year’s table stands to provide a different picture entirely. 

You won’t win a prize for predicting that this year’s PERE 30 ranking would produce little in the way of significant movement when compared to last year’s list.

With few large fund closings in the past year, the capital raising efforts of the world’s 30 largest private equity real estate firms pre-crisis were always destined to roll over into this year’s ranking. The total amount of equity raised for value-added and opportunity real estate fund investments from January 2005 to mid-April this year was $207.76 billion – almost the same as the $211.9 billion recorded last time round and covering the five-year period to mid-April 2009.

Predictably, The Blackstone Group and Morgan Stanley Real Estate Investing held on to positions one and two having corralled $24.05 billion and $19.15 billion respectively. Lehman Brother’s platform, now in asset management mode post-management buyout, has slipped from sixth to tenth and arguably even Starwood Capital Group’s (on-the-face-of-it) meteoric rise from 30th to 13th position came as no surprise.

In this column last year, PERE forecasted Starwood would rise considerably as it approached final closings in its twinned Starwood Global Opportunity Fund VIII (which raised more than $1.8 billion) and the Starwood Capital Hospitality Fund II (which closed on $965 million). Against a static fundraising backdrop, Starwood’s rise was so much more noticeable. That’s not to say its ability to close on such an equity haul shouldn’t be applauded. Its distressed strategy targeting borrowers, lenders and banks taken over by the US banking regulator, the Federal Deposit Insurance Corporation, obviously captivated investor attention at a time of relative distraction.

However, in trying to determine the movers and shakers in next year’s rankings, we could well be handing out prizes. There are enough anecdotes doing the gossip rounds to suggest that a number of this year's PERE 30 firms will not add much to their five-year fundraising hauls – at least in their current guises. But with increased fundraising totals said to be on the cards, there could well be more firms doing a Starwood.

Institutional investors in the US may have largely sat on the sidelines in 2009 and early 2010 in terms of making new real estate commitments, but few are retreating from the asset class. Instead, according to PERE sources, many are waiting for the right time (and right manager) in order to deploy their capital. Meanwhile, in Europe, INREV, the European association for investors in non-listed real estate, predicted fundraising totals would increase to €10.9 billion this year. This after the sector endured a 60 percent drop in 2009 – €5.9 billion was raised throughout the year, of which just 4 percent went to opportunity funds. The organisation said, however, that the total “masked” the work that fund managers were putting into forming new investment vehicles, the fruits of which are soon to be seen.

There could also be significantly more debutants to the PERE 30 next year than the three newcomers who arrived on the scene in 2010. Expect managers such as London-based Orion Capital Managers and Hong Kong-based CLSA Capital Partners, both of which closed on sizeable funds within the last six months, to enter the fray shortly. Indeed, Orion fell just short of the $2.45 billion minimum threshold required to make it onto the PERE 30.

Yes, The Blackstone Group and Morgan Stanley Real Estate Investing are likely to continue to lead the ranking – the latter is expected to hold its long-awaited final close on its seventh global investment fund imminently – but places three to 30 could well tell a different story come May 2011. You could say this year represented the calm before the storm.