Friday Letter The changing face of PERE 30

Wall Street’s retreat from the world of private equity real estate is manifest in this year’s PERE 30 ranking.The ranking also demonstrates how firms closer to the private equity world are beginning to fill the void. 

PERE summed up last year’s PERE 30 as the ‘the calm before the storm’. Not quite far enough along in the global financial crisis, 2010’s ranking harboured the capital-raising efforts of a number of platforms that today have either scaled back from the sector, merged with rivals or exited completely.

A year on and the picture looks clearer. As we detail in this month’s issue of PERE, ‘change is in the air’. Yes, residual efforts pre-crunch remain in the ranking, but they are far fewer. Predictably, but notable nonetheless, the presence of Wall Street’s investment banks is somewhat diminished.

Morgan Stanley Real Estate Investing (MSREI) continues to reside in second place this year on $15.65 billion behind the seemingly unmoveable Blackstone Group on $20.93 billion. But its five-year capital raising total has shrunk by $3.5 billion despite raising MSREF Global VII, its latest global opportunity fund that closed on $4.7 billion last year.

While MSREI didn’t move this time around, rival Goldman Sachs is starting to visibly slip down the ranking. This year’s fifth place finish with $9.2 billion follows last year’s fourth place showing and 2009’s third place – both previous rankings obtained with $13.58 billion. Next year will offer a stay of execution from a dramatic fall if there are no more relevant closings, as the latest offering in its Whitehall Street opportunity fund series closed on $4.8 billion in 2007, the same year it closed on $2.1 billion for its value-added GS Developing Markets Real Estate Fund.

Recently, however, the investment bank has made more noise about lower-risk real estate investments, having hired Jeff Barclay from ING Clarion Partners to lead a core and core-plus strategy. Should that strategy take centre stage, its ranking could decline meaningfully in 2013 when the aforementioned funds no longer count.

Somewhat befitting of the crisis fallout, Lehman Brothers Real Estate Private Equity’s place in the ranking has plummeted. In 2008, the platform commanded sixth place with $10.15 billion. That ranking was retained with $9.35 billion in 2009, but Lehman fell to 10th place with $7.15 billion last year. With only the $3.2 billion Lehman Brothers Real Estate Partners III fund still eligible for inclusion, the firm slid to 25th place this year. Reincarnated as Silverpeak Real Estate Partners following the spin out of the platform by its management, any forthcoming fundraising efforts by the platform would count as a new entry next year.

Citi Property Investors and Bank of America Merrill Lynch, two investment bank platforms consumed by private equity giants in the past 12 months, actually rose a handful places this year, though they are no longer capital raising forces. Their positive movement was only due to a combination of favourable currency movements and relatively more diminished capital-raising totals elsewhere.

With such a reducing presence from Wall Street’s finest – clearly a significant factor behind this year’s fundraising total of $183.77 billion being down by almost $24 billion on 2010’s total – the question arises who will take their place?

Try as it might, Blackstone is not going fill the void on its own, even if it does manage to attract another $10 billion for its Blackstone Real Estate Partners VII, fundraising for which started last month. But the New York giant alongside other private equity firms with an increasingly enthusiastic approach to bricks and mortar just might.

For early signs of this, you need look no further than the three PERE 30 debutants: Boston-based TA Associates (23rd: $3.23bn), Denver-based KSL Capital Partners (26th: $3.11bn) and Menlo Park-based GI Partners (30th: $2.48bn). All three operate in an undoubtedly real estate-heavy world. TA Associates has a dedicated real estate division to sit alongside its private equity activities, but both KSL and GI Partners centre their respective investment efforts on real estate asset-intensive operating companies.

And they are not alone. Arguably PERE’s biggest breaking news this year was about buyout titan Kohlberg Kravis & Roberts forging a more meaningful foothold in the real estate sector. The move initially was dedicated to understanding and extracting value from its existing real estate-intensive portfolio of assets alongside making direct real estate outlays. While not an immediate plan, a dedicated real estate fund is expected to emerge at some stage, and a betting person would gain good odds on its capital raising target being significant.

For one last piece of further evidence, just look to this year’s biggest riser, Lone Star Funds. Jon Grayken’s private equity and real estate giant is on the cusp of declaring a $4.2 billion closing on its second dedicated real estate effort, Lone Star Real Estate Fund II, a feat that saw the Dallas-based firm ascend 16 places.

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