Funds of funds attract double capital despite lower returns

Asia-Pacific saw a strong performance bounce-back after negative returns in 2016, according to a study by industry bodies INREV and ANREV.

The share of total capital raised in 2017 doubled for fund of funds, according to the latest study from ANREV and INREV, which define a real estate fund of funds as a collective investment vehicle that uses a strategy of holding a portfolio of investments in other real estate funds rather than investing directly in real estate.

INREV found that $160.2 billion of equity was raised for non-listed real estate in the year, with $8.5 billion or 5.2 percent destined for funds of funds vehicles. This is a record level of new capital for fund of funds, up from $3.2 billion that comprised 2.5 percent share of the total capital raised in 2016.

The surge in capital raised occurred even as fund of funds recorded a drop in total returns. According to the study that analysed the performance of 60 fund of funds, the average annual return of 5.1 percent was recorded in 2017, down from the 6.2 percent achieved in 2016.

All regional fund of funds strategies delivered positive returns, but those targeting Asia Pacific especially so. After a few years of subdued performance, Asia Pacific funds of funds posted a notable comeback with returns of 15.1 percent in 2017, after negative returns of 3.3 percent in 2016. In comparison, European and global funds generated 6.6 percent and 4.4 percent respectively, performances similar to the previous year.

According to an INREV spokesperson, the study does not point to specific reasons for the significant jump in the level of capital raised last year. However, the spokesperson said as real estate in general continues to perform well against other asset classes, typical investors in funds of funds – many of which are smaller organizations – are using these vehicles to extend their exposure to real estate.

The results also showed that one in seven investors plans to increase their allocations to funds of funds over the coming two years.

Among the respondents that planned to invest in Europe in the coming two years, 12.9 percent said they expect to allocate more to funds of funds, up from 7.8 percent in 2016. Meanwhile, 16.5 percent of investors expect to maintain the current allocation to funds of funds.

The fund of funds universe is almost evenly split across the three main investment styles, core, value-added and opportunity. However, core funds are much larger in size than the other two, making up 83.1 percent of total net asset value. They also are invested on an average in 20 vehicles and 16 managers, which is double the number for value-added and opportunity funds of funds.

Meanwhile, PERE’s data shows capital raising for real estate funds has decreased. The total equity raised, excluding debt funds, was $123.53 billion in 2017, down from $134.26 raised in 2016.