Whether the $37 billion raised by private equity real estate funds in 2005 marks a high water mark or a blast-off, the war chest bodes well for the future of this relatively new industry.
Even if fundraising retreats from here while investors wait out a market dislocation, the capital commitments stand at the ready. Following 2000, when US buyout funds raised $76 billion—a quantum leap over the previous year—the outlook for the industry suddenly soured. Portfolio company valuations crumbled and many GPs spent their time engaged in triage. It was a wonderful time to have “dry powder.”
Many of the private equity firms that raised capital just before the crash (and most did) have spent the past two years harvesting investments made during the turmoil, and their IRRs have been very impressive. This, in turn, has apparently caused LPs to forget the dark days of 2002 and 2003 and step up to the greatest fundraising bonanza ever seen.
Something similar could happen in private equity real estate, albeit with characteristics peculiar to this asset class. The flood of capital into property has lowered yields to dizzying depths, and some market observers predict a correction. But this is real estate, not, for example, digital telecom services. If valuations contract, there will be few catastrophic losses. What there will be is roughly $37 billion on the sidelines waiting for the kinds of opportunities that only a degree of market chaos can provide.
And in contrast to the late 1980s, institutional investors also know that fine returns often grow from troubled vintage years.
An alternative view of the big year in fundraising is that 2005 was the year that private equity real estate found its true stride as the appropriate way for investors to participate in global property investing. Limited partnerships (if structured correctly) align the interests of LPs and GPs. They encourage the transformation of assets and the seeking out of deals with “hair” on them. Private equity real estate, pursued by qualified pros, allows LPs to enjoy the value created right up until a property is deemed worthy of ownership by the expanding universe of public REITs.
You can expect PERE to cover whatever 2006 brings with precision, insight and the awareness that this industry is attracting money and talent at an accelerating rate.
Enjoy the issue,