Friday Letter Going, going, gone

Most of the legacy real estate fund businesses sponsored by financial institutions have disappeared from this year’s PERE 30 ranking, while strategic shifts and large older vintage funds do not bode well for the remaining bank-sponsored platforms.

Last year, PERE heralded ‘change in the air’ with regards to its PERE 30 ranking. Many of the GPs that comprised last year’s ranking were going through a transformation, whether it was acquiring competitors to achieve greater scale or gain access to a region, scaling back operations or exiting the business completely in the wake of the recent downturn or just adjusting strategy to take a new approach to investing and fundraising. Specifically, a number of financial institutions were getting out of the private equity real estate business, meaning no new capital was being added to those firms’ fundraising totals.

As poster-child of the global credit crunch, Lehman Brothers essentially has been defunct since the fall of 2008, but it made its exit official in 2010, spinning out its real estate group to former management. In addition, Citi Property Investors (CPI) was sold outright, finding an interested buyer in Apollo Global Management, while Bank of America Merrill Lynch took a hybrid approach, spinning off its European platform to management and selling its Asia unit to The Blackstone Group. Still, the historical fundraising activity of those firms managed to keep them in last year’s ranking.

One year later, two of those firms have disappeared from the PERE 30 and the other is on its way out.

CPI is no longer present, thanks to the elimination of two funds from the 2006 vintage that now fall outside the ranking’s five-year fundraising window. Indeed, the firm’s roughly $1.649 billion CPI Capital Partners Europe fund and its $600 million CPI Capital Partners North America fund are now outside the ranking’s parameters, leaving it with just its $1.292 billion CPI Capital Partners Asia Pacific fund and a small amount of co-investment for consideration.

Meanwhile, Lehman has experienced a steady decline since our first ranking in 2008, falling from a high of sixth place and $10.15 billion that year to 25th place and $3.2 billion last year. With Lehman returning $1.9 billion in uninvested capital from its last eligible fund, Lehman Brothers Real Estate Partners III, upon completion of the management buyout, the firm now falls below the top 30 capital-raisers.

The only remnant still in the PERE 30 is Bank of America Merrill Lynch, which is hanging in on the strength of its ill-fated $2.65 billion Asian Real Estate Opportunities Fund and two smaller European funds. It is highly likely that the firm will remain in the ranking next year, as the Asian fund will still be eligible given its 2008 final closing. After that, however, the firm’s real estate platform is history.

That would just leave Morgan Stanley Real Estate Investing (MSREI) and Goldman Sachs as the last of bank-sponsored real estate platforms in the PERE 30. While the two firms currently enjoy elite positions in the ranking – at spots two and three, respectively – large older vintage funds and strategic shifts in response changing LP interests and a tough fundraising environment may knock the pair from their lofty perch in the near future.

For example, MSREI’s five-year fundraising total shrunk by $3.5 billion to $15.65 billion last year and a further $3 billion this year. The real hit, however, comes next year when its $8 billion Morgan Stanley Real Estate Fund VI International falls outside the ranking’s five-year window. While the firm may be able to recoup some of that if it is successful with its new US-focused fund, which is targeting $1 billion, the reality is that MSREI is likely fall outside the top 10.

Goldman faces a similar dilemma next year. Indeed, its $4.8 billion Whitehall Global 2007 fund and its $2.1 billion GS Developing Markets Real Estate Fund will fall outside the ranking’s five-year window in 2013, dropping the firm into the same company as MSREI. Unlike MSREI, however, Goldman does not have any plans for new value-added or opportunistic real estate equity funds on the horizon, as the firm is positioning itself to become more active in real estate debt and core/core-plus strategies, neither of which count toward the PERE 30 ranking. Furthermore, without new private equity-style fundraising activity, Goldman could be out of the ranking entirely by 2014.

To read more about the PERE 30 and to see the ranking in full, click here