Sitting atop PERE’s inaugural ranking of fund formation law firms, both in terms of the value and number of funds formed, are two behemoths. Simpson Thacher & Bartlett was responsible for 11 fund closes during the October 1, 2021 to September 31, 2022 window of eligibility, while Kirkland & Ellis International oversaw eight completed fundraises. Combined, these 19 fundraises accounted for almost half of the $93.6 billion overseen by the 15 entrants on the inaugural list.
This concentration at the top played out in real estate fundraising overall. According to PERE data, annual fundraising fell 24 percent in 2022, to $168.7 billion, but the average size of funds grew to $522 million. That means more money is going to fewer managers.
“The concentration in the number of funds that are getting the lion’s share of the money has gone up,” Michael Wolitzer, head of Simpson Thacher’s investment funds practice, tells PERE. “The larger, most successful, most well-known sponsors are taking up more of the capital than ever before.”
The perceived safety of experience is driving a lot of this, which has only been exacerbated by the market volatility of the past year. Those managers that have already navigated previous cycles will, and are, continuing to raise capital, Wolitzer says.
This has encouraged a focus on familiar structures and strategies. Daniel Drabkin, partner at Clifford Chance, which placed third in the ranking by sum of fund value and sixth by number of funds formed, says that managers are opting for fund documents that are “middle of the fairway,” with many avoiding new structures or anything esoteric to spook investors.
“You want to go to market with something that nobody’s going to scratch their head about,” Drabkin says. “[Investors] say ‘despite the market headwinds, this is going to work,’ and they see [managers’] papers, and they are exactly what they would expect.”
The debt portion
Equity managers are seeking logistics and multifamily, as well as niche property types such as life sciences. Unsurprisingly, there are few funds being raised for retail and office, multiple fund formation lawyers tell PERE.
Where most of the attention lies now for fund formation is debt. “There’s increased enthusiasm for the debt markets these days,” Drabkin says.
That is driven by a high interest rate environment making returns higher at a lower risk attachment point, and a retrenchment of traditional lenders in the space due to market challenges.
“There are areas of real estate that are challenged. You can get now a very attractive return with the security of being in a senior position with debt in real estate,” Wolitzer says. “There’s a lot of double-digit-performing real estate debt that people can invest in.”
The maturity of the debt market dovetails with the final major trend in fund formation: a focus on targeted strategies. Alongside the focus on the top performing, weather-tested managers, the other type of manager investors are drawn to are sector specialists.
Big investors that want to put capital to work in specific sectors can control their allocations this way, says Kelly Ryan, partner and global leader of Kirkland & Ellis’ real estate funds practice. That preference is showing up in the debt space as more real estate lending becomes privatized.
“[There is] a much deeper supply of debt capital that’s being provided by real estate sponsors,” Ryan adds. “You’re going to see the sector-specific groups bringing products that are tailored around their sector.”
The maturity of the real estate market has allowed many firms to take a foothold in an ever varying and more specialized asset class. Watching how PERE’s league table of the most active law firms in real estate fund formation changes will be useful for gauging the changes still to come.