After a dip in new fundraises during the past three years, the private equity real estate funds market can expect a surge in new closed-end vehicles in 2012, according to new research from real estate consultant The Townsend Group.
“We’ve been really surprised at the number of funds that came in [the market] in the first quarter,” said Terri Herubin, a principal and portfolio manager at the Cleveland, Ohio-based firm, speaking at the PERE Global Investor Forum 2012 in Los Angeles. New closed-end real estate fund launches being tracked by Townsend reached 115 during the first three months of 2012, and are on pace to climb to 466 by the end of the year. Townsend counted a total of 513 private real estate funds in the market as of 31 March, but said its database was not comprehensive.
The projected tally for new funds in 2012 represents about a 50 percent increase from the 307 new funds that were introduced in 2011, and the highest number of new entries in the past seven years, according to Townsend's database. While 2008 was a robust year for new funds, the numbers dropped off in 2009 and 2010, partly because much of the capital raised in 2007 and 2008 still had not been invested at that time.
But despite the rise in the number of new funds, “it’s still a tough fundraising environment for most funds,” said Herubin. Less than 20 percent of funds that launched in 2011 held a first close after less than a year in market, compared to more than 60 percent in 2005. Also, 2009, 2010 and 2011 vintage year funds are expected to continue to raise capital throughout the year.
Part of the reason for the longer fundraising periods is the reduction in capital returned to investors. From 2005 to 2007, investors were getting about one-third of the capital they had invested between 1997 and 2001. “Today, it’s not unusual for someone to have less than 10 percent of capital back from funds that they invested in 2006 to 2008,” said Herubin. “So that makes it more difficult to put new money out.”
Investor demand for funds, moreover, has abated in recent years. While investors committed about the same amount of capital to real estate in 2010 and 2011 – $9.2 billion – the percentage going to funds declined from 89 percent to 83 percent during the two-year period, with the remainder allocated to separate accounts, co-investments, secondaries and recapitalisations, according to the Townsend presentation.
“There was a real trend that we saw happening in late 2010, where a lot of our investors didn’t want to be in funds,” said Herubin. “They wanted to try to find ways to access the co-investment market or some way to enter where they would be able to invest directly in real estate.”
Of the investor capital that went into real estate funds, 33 percent was directed to open-end funds – which primarily comprise core but also some value-add strategies – in 2010; that number declined to 22 percent the following year. Meanwhile, closed-end value-add and opportunistic funds attracted an additional $1 billion of capital during that time period. This rise in capital flow to non-core funds, however, partly was the result of investors being unable to put capital into open-end funds before queues for deposits began building up.