Friday Letter Having too much fund?

Fund of funds, which raise equity from investors and then commit that equity to individual fund managers, first started popping up in private equity real estate during the late 1990s, almost a decade after the birth of the asset class in the US. First, it was groups like Bessemer Trust and TKP Investments who were selling these products to their clients. Then, about five years ago, the concept really started to pick up steam as US firms like Credit Suisse, Metropolitan Real Estate and Fiduciary Trust began launching their own fund of funds vehicles. Today, of course, fund of funds, much like the rest of the industry, have gone global. 

Fund of funds focused on Europe, for example, are a relatively new phenomenon. It wasn’t until 2004 that Aberdeen Property Investors launched one of the first pan-European fund of funds vehicles, followed closely by Portugal-based Atrium Investimentos. Now, fund of funds are unsurprisingly turning towards the property markets of Asia. And once again, Aberdeen seems to be leading the way. Recently, the firm held a close on $435 million (€325 million) for its AIPP Asia fund and it has already placed $172 million in four funds in the region.

The establishment of AIPP Asia is one example of the maturation of Asia’s property market. As everyone knows, more and more capital is moving into the region and fund of funds will no doubt add even more frenzy to the scramble for the best Asian-focused vehicles. Add to this inflow of capital the up-tick in global fund of funds such as those being raised by LaSalle Investment Management and Goldman Sachs, all of which will likely target Asia as well, and competition for the best managers becomes even more heated.

Given the underlying fundamentals in Asia, real estate fund of funds are certain to grow and develop over time, gaining in size and prominence much like they did in both private equity and the real estate markets of the US and Europe. Unlike private equity, however, the real estate fund of funds business is growing at a much faster pace than in the past. There was no ten-year lag. In fact, it has only been two short years since opportunity funds first began targeting Asia en masse.

That’s not to say fund of funds are a bad bet. They can certainly provide large investors access to new markets and smaller investor ccess to new managers. But the amount of capital targeting the relatively immature Asian market leaves a lot of questions open about the returns that can be achieved. Investors may be happy to gain access, but they shouldn’t necessarily expect a golden panacea on the other side of the door.