Friday Letter Young and Restless

The market is filled with aspiring fund managers. But in the June issue of PERE magazine we profile 10 “emerging managers” that you can expect to grow by leaps and bounds going forward. These are the strong teams that will have to survive what many foresee is going to be an increasingly Darwinian fundraising environment. 

The boom in private equity real estate over the past several years has seen many new fund managers enter this attractive asset class. However with the credit dislocation showing no signs of abating, and some predicting it will get worse before it gets better, senior figures in the industry are now warning that fledging managers could start to feel the pinch

Part of it comes down to the LP “denominator effect,” whereby the real estate assets of institutional investors have swollen as a percentage of their overall portfolio. Many limited partners as a result are taking a wait-and-approach before opting to invest in any more real estate private equity funds. The other is simple supply and demand – there are now so many fund managers out there, LPs can afford to be picky.

During this week’s IMN Real Estate Opportunity and Private Fund Investing Forum in New York, several chief executive officers predicted the industry was about to undergo some downsizing. California Public Employees Retirement System (CalPERS) is one such LP starting to “streamline” the number of GPs it commits capital to, with the pension fund seeking to pare back its relationships over the next three to five years.

New firms without a track record will be the hardest hit, with many professionals at the conference expecting to see a raft of “one-fund wonders.”

With more than 200 dedicated private equity real estate funds currently in the market, according to proprietary data from PERE magazine, emerging managers will now have a much harder task of proving their worth – and their ability to manage investors’ capital. Not everyone is going to be the next Blackstone or Morgan Stanley, after all.

PERE however has highlighted what it feels are 10 of the younger firms that we feel have definite staying power. The 10 are: Benson Elliot Capital Management; Doran Capital Partners; Dune Real Estate Partners; Harrison Street Real Estate Capital; Moor Park Capital; Northwood Investors; Perella Weinberg; Prosperitas; Red Fort Capital; and Samsara Capital.

In the new edition of our magazine, PERE will take a look at these “young and restless” firms, some of whom are expected to follow in the footsteps of the larger institutions, such as Blackstone, while others will establish niche strategies that command loyal followings.

What is key for all these 10 firms though, and for the many firms recommended to our editorial team, is their ability to sell their franchise to investors. Those that fail to tell a really good story, face falling by the wayside. As one chief executive explained at IMN, when pitching to an LP nowadays “it had better make sense because the bar is higher.”