Is the global megafund back?
That is the question many in the private equity real estate community are asking after industry heavyweight The Blackstone Group announced that it would start fundraising for its next global opportunity fund – a potentially $10 billion-plus vehicle – this year.
During an earnings call with investors on 3 February, the New York-based private equity giant said it was 70 percent invested in its $10.9 billion fund, Blackstone Real Estate Partners (BREP) VI, with expectations the 2008 vintage vehicle would be fully invested within “a deal or two”. As a result, Blackstone president and chief operating officer Tony James said the firm would start fundraising for BREP VII, targeting a similar equity haul to its predecessor fund.
“Our target would be to do something similar,” James said. “It’s a tough fundraising environment so there will be some investors clearly not able to do the size [they were] once able to do. However, he added that “[we’re] hopeful to come in close to that same size”.
And Blackstone is not the only one to look at raising billion dollar funds. In December, Angelo, Gordon & Co. filed Form Ds with the US Securities and Exchange Commission for two big funds – AG Realty Fund VIII, with a target of $2 billion, and AG Core Plus Realty Fund III, with a target of $1.5 billion. Angelo Gordon declined to comment on the two funds, but it is likely that fundraising efforts have been put on hold due to the untimely passing of Keith Barket, global head of the firm’s real estate group.
Nevertheless, the aggregate of fundraising activity for $1 billion-plus global funds seems to be experiencing a resurgence. However, to better understand the surprise at the return of real estate megafunds, a little bit of recent history is in order.
Mirroring the over-exuberance of the financial markets, megafunds were en vogue in private equity real estate until the global financial crisis hit. As liquidity dried up and the real estate markets tanked, support for these jumbo funds wavered and many of the sponsor firms struggled to raise additional funds. In a flight to quality, LPs starting turning to select core investments through club deals or through smaller, more targeted funds run by operators as opposed to allocators. Indeed, many thought Morgan Stanley Real Estate Investing’s decision last year to close its latest fund at $4.7 billion – less than half of its original target of $10 billion – was a death knell for the megafund.
So, with fundraising activity still struggling, where is the traction for these huge funds coming from?
It seems the answer to that question comes down to simple supply and demand. On the supply side, there are fewer large GPs with the ability to raise such megafunds. Indeed, a number of large players have exited the business through sales, mergers or simply by closing up shop, while others have become bogged down by the poor performance of their legacy funds or still have significant capital that they need to put to work. That reduces the number of capable GPs with established track records and strong performance to a mere handful, making for significantly less competition.
On the demand side, it is true that some of the world’s largest LPs have shied away from such commingled efforts. James alluded to that when he mentioned Blackstone’s next fund. But outside the 40 to 50 largest LPs in the world, most others still invest in real estate through funds. Therefore, why not invest in the new megafund of a GP that historically has delivered strong performance and seemingly lands every major investment opportunity?