Friday Letter The super seventies

For those who thought 2006 was a knockout year for private equity real estate fundraising, hold on to your socks. The year just passed marked a new milestone. 

According to proprietary data from PERE magazine, private equity real estate funds raised a record $71 billion (€49 billion) in 2007, a 32 percent increase over 2006’s total of $54 billion, and more than twice the $34 billion raised in 2005.

The fundraising market benefited from rising allocations among limited partners to the real estate asset class. “Demand by investors to increase their alternative space is still very, very strong,” Jack Foster, managing director and head of real estate at Franklin Templeton Real Estate Advisors, recently told PERE magazine. There was strong momentum in 2007 from pension funds and other institutions, who wanted to put more money to work in the real estate sector or to further diversify their real estate holdings, and often to gain entry to emerging markets. For example, pension giants CalPERS and CalSTRS both increased their allocations to real estate in 2007, with CalPERS directing 10 percent of its $250 billion portfolio to real estate, up from its previous allocation of 8 percent. Numerous public pension plans followed suit.

As any general partner of a private equity real estate firm sprinting to catch connecting flights from one end of the world to the other can attest, LPs around the globe showed a rising demand for allocating capital around the globe. Globally focused funds accounted for nearly half of all funds closed in 2007, with North America-focused funds comprising a quarter and funds targeting Asia/rest of the world and Europe each accounting for 17 percent of the pie.

Big players with global funds such as Morgan Stanley Real Estate and The Blackstone Group materially impacted 2007 fundraising figures. Both touted outsized global funds, Morgan Stanley with its $8 billion Morgan Stanley Real Estate Fund VI International and Blackstone, which already exceeded $10 billion on Blackstone Real Estate Partners VI fund, and has yet to officially announce a final close.

Here we are barely into the new year and private equity real estate firms are already rocketing off to a strong start. Media entrepreneur Robert Johnson’s RLJ Development closed its RLJ Real Estate Fund III this January on $1.2 billion. Meanwhile, in Europe, Cordea Savills has closed on a €300 million fund directed toward property investments in Italy. Stockholm-based Niam also announced this week it was looking to raise €700 million from investors for its latest vehicle targeting the Nordic and Baltic countries.

With the ongoing credit crunch across the global real estate market, whether 2008 will be as big of a fundraising bonanza as was the year just passed is questionable. But the strong numbers so far suggest good times ahead.

A complete list of private equity real estate funds closed in 2007 appears in the February 2008 issue of PERE, out now. Click here to learn more.