As institutional investors in both the US and Europe have sought to diversify their investments, funds of funds have become an increasingly popular tool. This trend has certainly extended to real estate investing, with so many property funds of funds having been launched recently it might be getting hard to keep track of them all.
It is certainly a sign of the times that INREV, the European Association for Investors in Non-Listed Real Estate, this week unveiled a database that for the first time charts the growth, strategy and target regions in the expanding real estate funds of funds sector.
The association identifies 36 vehicles in its newly established fund of fund database with a combined target equity raising of €12 billion ($17 billion). Twenty-two of those vehicles are closed-ended and 14 are open-ended, and on average they have invested in 10 underlying funds, though the average target is to invest in 14.
What is perhaps most interesting about the study is the rapid rise in the number of vehicles being invested since they first emerged in 2003. In 2004 there were four vehicles, in 2005 there were six, and in 2006 there were 10, peaking this year with 14. Also interesting is the target for these new vehicles. Of the total target equity in funds of funds where managers indicated their investment strategies, €3 billion will target core vehicles, €5.3 billion value-added and €2.1 billion will look to invest in opportunity funds. Sixty-eight percent of the £12 billion is targeting Europe, 17 percent Asia, and only 4 percent is allocated to invest in US vehicles.
A big reason for this difference is that historically, private equity real estate funds of funds have had a more established tradition in Europe than in the US, and that interest in Europe has come mostly from larger investors such as pension funds, banks and insurance companies. In the US, on the other hand, those property funds of funds that have been established have largely been the domain of small investors.
But another key reason for the difference is that these funds are increasing in popularity because they are seen as a diversification strategy outside the property market turbulence of the US and perhaps Western Europe. The data released by INREV this week reinforces the fact that, not only does Europe have a head-start in this area, but also the purpose of these funds is largely to invest in emerging markets.