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FRIDAY LETTER: Winner takes all

Blackstone’s $15 billion fundraising for BREP VIII is a milestone on multiple fronts. But that isn’t necessarily good news for the rest of the market.

At the Pension Real Estate Association’s spring conference in Washington, DC last week, one US fund manager found himself sitting next to someone from The Blackstone Group. As he later related to PERE, he felt “embarrassed” by the seating arrangement. That’s because he knew how much Blackstone had just raised for its latest global real estate fund.

In case you’ve missed the headlines this week, Blackstone has blazed through its fundraising for its next global opportunistic real estate fund, Blackstone Real Estate Partners VIII. It managed to exceed its $15 billion hard cap after less than four months in market – an unprecedented amount and pace for a property fund, both for the firm and the industry overall. 

Also, and not insignificantly, BREP VIII marked the first time that Blackstone had raised a ‘one and done’ fund – a vehicle that amasses its entire target or cap in a single close – in real estate. It’s a feat that few other managers of multi-billion dollar real estate funds have been able to accomplish. One exception is Lone Star Funds, which also is anticipated to hold a single close this month for its latest real estate offering, the $5 billion Lone Star Real Estate Fund IV. But the Dallas firm is an outlier to the rule.

Judging by the runaway success of these two funds, one may come to the conclusion that the fundraising market has bounced back – in a big way. As is often the case, however, the headlines don’t tell the whole story. Far from it.

In fact, if recent fundraising statistics are anything to go by, the ‘haves’ of the industry are shrinking in number. According to London-based advisory services firm EY, the top 10 largest funds collected 40 percent of the capital raised in 2014. Thanks to Blackstone’s mammoth BREP VIII, those numbers are certain to be even more skewed in 2015. So more capital is going into fewer, not more funds, which is not welcome news for the more than 700 other property vehicles currently seeking commitments globally. 

Most firms can only dream of ever raising a ‘one and done’ fund, especially of the sizes of the Blackstone and Lone Star funds. 

To be fair, those two firms have the impressive track records, strong platforms and various competitive advantages in the market that many others currently out on the fundraising trail do not have. 

Their clout in the industry even has enabled them to hold group due diligence sessions for their funds, which has helped them to get over the finish line much more quickly. Many other fund managers would be hard-pressed to ask the same of their investors.

On the other hand, certain market conditions that are enabling Blackstone and Lone Star to hold massive single closes are making it harder for other fund managers to attract capital. It is true that firms generally are raising funds in less time than they had in recent years, as a result of growing optimism about the real estate market and heightened interest in the asset class. But with many investors curtailing their number of investment managers, a limited partner is much more inclined to re-invest with an existing, well-performing manager than to go through the time and effort of underwriting a new firm. All too often, promising but less ‘safe’ managers are walking home empty-handed.

It’s not a healthy fundraising environment when many ‘have nots’ are still struggling to raise capital. But private equity real estate fundraising is increasingly becoming ‘winner takes all,’ and that’s become the name of the game.