PERE 100 looks beyond the big two

Since PERE started ranking managers by capital raised in 2008, Blackstone has always been on top. The ‘Blackstone gap,’ the distance between the New York-based firm and the number two, has changed since the inaugural ranking, but it has never faltered. Nor has it fallen short of $20 billion since 2014. This time the gap is almost twice as wide, at $36.8 billion.

Blackstone’s dominance makes it easy to overlook another gap that has emerged. Toronto-based Brookfield ranked second for the past six consecutive rankings, and for seven of the last 10. This year, the gap between Brookfield and third-place Starwood Capital stands at $21.6 billion. In 2022, their gap was at its biggest at $23.8 billion. This consistent separation between second and third place introduces the concept of the ‘Brookfield gap,’ too.

Combined, the five-year fundraising totals of Blackstone and Brookfield account for $107 billion, almost 15 percent, of the aggregate $722.2 billion of capital raised by the entire PERE 100. That proportionate representation has become a mainstay feature. But it also poses the question: to what degree are their successes masking a broader reality for institutional appetite for the sector?

In April, Blackstone broke its own private real estate fundraising record – again – collecting $30.4 billion for its Blackstone Real Estate Partners X fund. The view at the firm is its track record of strong performance from investing at scale over the long term has made it a good bet on real estate at any point – regardless of any negative perceptions of the sector. The firm has gained this reputation by generating net IRRs of 16 percent from more than $100 billion of capital commitments raised since starting the series in 1991.

Referencing today’s macroeconomic difficulties, Kathleen McCarthy, global co-head of Blackstone Real Estate, tells PERE: “Periods of volatility are when we have made some of our most successful investments… in an environment where it is tough to fundraise, that kind of performance and experience through different cycles is appealing to investors and distinguishes Blackstone.”

Senior executives at Brookfield say similar. From the firm’s opportunistic vehicles, including global fund series Brookfield Strategic Real Estate Partners, it has generated net returns of 19.5 percent since 2006. Craig Noble, chief executive officer of alternative investments at Brookfield, cannot comment on returns. But he tells PERE: “Markets come and go, and there are cycles, particularly in real estate. But that’s why we’ve always stayed focused on investing for value and enhancing returns through operations.”

Proxy for real estate

Steven Cowins, a fund formation specialist and co-chair of law firm Greenberg Traurig’s real estate funds group, believes Blackstone and Brookfield’s dominance is the product of a self-
fulfilling prophecy, whereby large institutional investors, keen to invest at scale, feel obliged to back their flagship funds when available. By his reckoning, they have become a proxy for the asset class.

“Blackstone and Brookfield would see themselves as alpha in terms of returns,” Cowins says. “But how much are they seen as beta by the capital? You have to invest, if you can, with Blackstone and Brookfield. That’s the market beta now.”

Noble rejects the description, stating opportunistic and value-add investing “is not meant to be a proxy as we seek to meaningfully outperform the broader real estate market.” But he agrees that, for many investors, his firm has become their bet on real estate: “What we are hearing from investors is Brookfield is our real estate manager.” For Noble, this reflects a landscape where institutions want to commit more capital to fewer managers for private markets allocations.

Nancy Lashine, managing partner at New York-based capital advisory firm Park Madison Partners, believes the proxy analogy has limitations. “There’s no one manager that can really be a proxy for this multi-trillion-dollar market. Blackstone and Brookfield pick their themes, and you bet on those themes.”

Nonetheless, other managers recognize the need to provide complementary offerings to the industry’s two behemoths. Steve Orbuch, president at New York-headquartered Sculptor Real Estate, which ranks 72 with $3.1 billion, says the firm’s deliberately uncorrelated investment strategy – which runs the gamut from care homes to Native American gaming assets – is designed to differentiate it from more traditional offerings. “We know we have to be different,” he says. “Our approach includes certain niche investment strategies that are less correlated to GDP growth and deliberately don’t overlap with the traditional property sectors.”

Could the status quo change? Certainly, the funds of private real estate’s numbers one and two are offering increasingly different asset exposures. Blackstone once had meaningful office holdings. In May, Ken Caplan, Blackstone’s other global real estate head, posted on networking site LinkedIn the firm’s US office holdings represented less than 2 percent of its global real estate equity portfolio. Brookfield, conversely, maintains a conviction for modern, well-located, ESG-compliant workspace.

Lashine believes change is happening. “Index efforts were the past way to get real scale.”

She says there are more investors that today pride themselves on picking the best themes in the market, placing greater emphasis away from the ranking’s top two managers.

This year’s PERE 100 would support this point. Blackstone and Brookfield’s proportionate dominance is intact, as are their respective gaps. But the aggregate fundraising by managers ranked places three to 100 also keeps growing, supporting the argument their dominance distracts from managers growing their relevance elsewhere, too.