After a tough year for private real estate funds, top law firms active in the space tell PERE they are seeing a relative uptick in fundraising momentum so far in 2024.
“Now we’ve flipped over the calendar to a new year, certainly on the closed-end side, we’re seeing more activity,” says Matt Posthuma, Chicago-based co-leader of the real estate funds team at Ropes & Gray, which sits among the top 10 most active real estate fund formation law firms in PERE’s 2024 analysis for both number and value of funds advised.
“The idea is that as valuations go down 2024 and 2025 are going to be really good vintages for closed-end funds where people are going to buy at some pretty low valuations,” he says.
Eric Requenez, the firm’s New York-based real estate funds co-leader, adds that real estate credit is one of the main areas in which the firm has seen increased activity in the first quarter.
This observation is shared by Jonathan Karen, private funds partner at Simpson Thacher & Bartlett in New York. The law firm advised on $37.5 billion worth of closed-end private real estate funds that reached a final close between October 2022 and September 2023 – more than any other firm in the period, according to PERE’s analysis.
“Debt is more in favor than ever,” says Karen. “More and more investors are recognizing that there is opportunity in this area now, without having to call the bottom of the market first.”
Notwithstanding the momentum behind debt strategies, a lack of realizations from real estate across the board means the pace of commitments from investors will remain slower, he adds. “I think we’re likely to see an extension of what 2023 looked like in terms of fundraising and consolidation to the larger, more successful managers,” says Karen. “When you think about allocations and who’s committing, 2024 is almost already spoken for.”
As such, some managers are opting to compromise to give themselves the best chance of success. “Sponsors are working to get fundraising wrapped up as quickly as possible, and that’s sometimes done by incentivizing people to commit early and in as large amounts as they can,” says Karen.
This is translating into increasing customization for investor preferences, he adds, both in terms of economic incentives and a more flexible investment approach. “Whereas in the past a manager would say, ‘this is the fund, these are the economics, come one come all,’ the trend of price discrimination or customization for investors has increased,” says Karen.
To fee or not to fee
According to Requenez, fee haircuts have become commonplace to secure investor commitments. In some distressed situations, managers are even raising capital on a no-fee basis.
“Given where interest rates are, and where and how quickly they may move, some clients are also considering doing a floating hurdle rate with new funds,” he adds. “I think that’s going to be something that people start thinking about more.”
Not all investors are opting to take advantage of the stronger hand they have in today’s market, however. “We haven’t seen significant downward pressure on fees or carry,” says Justin Cornelius, a London-based partner in the real estate group at Goodwin, which according to PERE data has advised on $9.7 billion of real estate fund closings in the qualifying period.
“There’s an acknowledgment that fee levels are not excessive – they’re set at the right level to enable managers to essentially run the business and meet their overhead costs, but there aren’t huge profits being taken out of management fees at the moment,” he says. “We’re at a level where everyone understands that the cost basis is appropriate relative to the fee, and there’s no need to put more pressure on that.”
Indeed, even for existing funds where he has seen extensions to both the investment period and fund term, Cornelius says most managers have been able to continue to charge fees on the same basis.
Where he has noticed investors exerting more influence, however, is around product strategy. “Investors want to have greater control on the deployment of their capital, meaning they are trending toward separate accounts and co-investment vehicles, particularly in the case of the large sovereign funds,” he explains.
Indeed, Karen says the largest investors are the most likely to receive special consideration, either through fee breaks or the facilitation of co-investment or other customized vehicles to suit certain policy requirements.
With fundraising taking longer and commitments expected to continue to concentrate with the largest and most successful firms, a manager’s ability to offer flexibility to investors will prove a differentiator in a tight fundraising market.
The other key differentiator, says Requenez, will be how a manager shows its investors how it intends to manage the uncertainty around interest rates and the increased costs that continue to impact real estate investments.
With economists in disagreement over the projected timing of rate cuts this year, the burgeoning optimism in capital markets will not be taken for granted by real estate managers on the road.
If you do not receive this within five minutes, please try to sign in again. If the problem persists, please email: 
