Fund family values

In the retail business, distribution companies sometimes have a hard time growing if they don't offer a large enough range of products to stores. If you offer only cool mint toothpaste, you're only going to grow to a certain level. If you offer cool mint, breathbooster and special whitening formula, you reach the next level. If you offer eight kinds of oral care brands as well as several hundred other items, you're Procter & Gamble.

Compared against the household products industry, private equity real estate is at an almost prehistoric stage of development – somewhere around the invention of lye soap. Many firms are still running with the “opportunistic” label, affixed amid the wreckage of early 1990s US real estate. That term implies a group of GPs who strike during historic dislocations and then presumably disband after the job is done, like at the end of “Seven Samurai.” And yet, these samurai keep forming new funds through all kinds of markets and in new geographies, targeting new kinds of assets. At any moment and in any location there are real estate opportunities that offer the chance to create long-term capital gains through long-term asset control and transformation. Opportunity funds have become private equity real estate. It's a repeat business and scalable.

Compared against the household products industry, private equity real estate is at an almost prehistoric stage of development – somewhere around the invention of lye soap.

Among the many indicators that private equity real estate has progressed to an important milestone as an industry is this – the PERE 30, released for the first time in this issue of PERE magazine (see p. 35) shows that together the largest 30 private equity real estate firms in the world have raised $190 billion over the past five years. Most of this has been raised over the past two years, during which many firms crossed the billion dollar-fund threshold (and Blackstone crossed the 10 billion dollar-fund threshold). If you leverage all this up (remember leverage?) you get some considerable buying power.

Private equity real estate, now the most popular approach to real estate among institutional investors, still has far to go. While our 30 firms raised $190 billion, the largest 30 private equity firms (sometimes just down the hall) raised $658 billion, according to a similar ranking released this month by sister publication Private Equity International.

The largest private equity firms have gotten large because they've produced good returns, gone after larger and larger deals and also because they've proliferated the products they offer. The laws of business that apply to your local drug store also apply to private equity. This year, for the second year in a row, The Carlyle Group tops the ranking of the largest private equity funds, called the PEI 50. Carlyle arguably invented the concept of the multi-product alternative investment manager. Just within the private equity strategy, it has Japan buyout, renewable energy, European venture… a new fund seems to be produced each month. While Carlyle, for now, has no single fund that is the largest in its genre, it has dominated the fundraising market by offering a product for almost any LP taste.

Of the largest private equity firms, the one to have grown the most over the past year has been TPG, which not only has raised among the largest private equity funds on the planet, but has launched fundraising for large Asian, distressed debt, financial services and several other TPG-branded funds.

Several of the PERE 30 funds get the multi-product proposition. LaSalle Investment Management, for example, isn't the largest firm on the list, but it may have the largest variety of fund types, from Mexican industrial to Japan logistics to medical office. If these do well, they will grow as separate silos within LaSalle at a rate that could be greater than if LaSalle invested out of one big fund.

Even mighty Goldman Sachs is adopting multi-strategy within its real estate group. After years raising Whitehall funds, the firm in 2005 raised nearly $500 million for a Caribbean fund and last year raised more than $2 billion for a developing markets fund. Many of the same LPs to the Whitehall funds are no doubt happy to double down with Goldman in more targeted strategies.

Mature industries are dominated by big brands, where consumers place faith in new products from purveyors of successful core products. As the PERE 30 grows in assets under management, expect to see the largest firms offer every flavor of real estate.