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Friday Letter: Worse than last year?

Real estate funds currently in market have secured just 10 percent of their targeted capital commitments as LPs sense there’s no penalty in waiting to invest. 

The year 2010 couldn’t possibly be worse for real estate fundraising than the dreadful 2009, could it?

With the end of third quarter looming upon us, questions are repeatedly being asked about the ability of GPs to close on more capital than the lows seen in 2009, or whether the restraint still being shown by LPs will result in a newfound fundraising bottom? According to data from PERE and other industry sources, 2010 could go either way.

To date in 2010, closed-ended value-added and opportunistic funds have closed on roughly $19 billion of capital, according to PERE data. The total raised in all of 2009 was $30 billion, which itself compared poorly to the highs of 2007 and 2008, when fundraising peaked at $85 billion and $74 billion respectively.

However, the inability to close on commitments is certainly not through want of trying. Cleveland-based consultant The Townsend Group counts around 430 private equity and debt real estate funds currently in fundraising mode targeting slightly more than $130 billion of capital globally. The firm's latest figures show that these vehicles have managed to corral an estimated $13.4 billion of commitments to date – just 10 percent of their initial targets. GPs, therefore, have some way to go to reach their goals, and clearly some of them will never get there.

Part of the challenge facing fund managers out raising real estate vehicles is the simple fact that many limited partners are not in a hurry to hand out capital. Even though liquidity concerns are no longer the most pressing issue for institutional investors, a lack of real estate deal flow means LPs can afford to wait before taking part in a fund. If a GP can’t find ways to (sensibly) spend his capital, why should an LP take the added risk of buying into a fund at the first close? Why not wait for a later closing and buy into the vehicle at, say, cost plus a small pref. As one fundraising professional explained: “For the most part, [LPs sense] there’s no penalty for waiting.”

As a result, many GPs are downwardly revising their equity commitment targets. New York-based fund of funds Clerestory Capital this week revealed that 31 opportunistic funds entered the fundraising market in the first half of 2010, seeking commitments of $11.3 billion. Thirty of the vehicles were looking to raise less than $1 billion, while one new fund was targeting $1.5 billion.

A quick and rough calculation suggests therefore that the 30 new funds are targeting on average just $376 million each. It’s a trend supported by Townsend data, which shows fundraising targets for most funds now back down below 2005 levels.

Yet with only four months left to go before the industry brings a close on 2010, the question remains whether GPs will be able to surpass the fundraising total of 2009.

Without any sizeable increase in real estate transactions, LPs will remain cautious in rushing to commit to new funds, let alone new managers, and this may mean that, yes, 2010 will be an even worse fundraising year than 2009.