As capital raising remains a significant challenge, it’s survival of the fittest in the real estate fund manager world. “Of course today’s real estate private equity market consists of ‘haves’ and ‘have nots,’” said Walter Stackler, managing director at Greenhill & Company, during a panel on fundraising at the PERE Forum in New York yesterday. “In a properly functioning market, not everyone is going to be successful.”
Stackler noted that, “during the peak, a number of ‘shouldn’t have hads’ raised money and that wasn’t healthy.” As liquidity and access to capital become growing concerns for general partners, the elimination of the ‘have nots’ will be part of “a natural evolution” of the industry, he said.
While some fund managers will go out of business as a result of being poor fiduciaries or other flawed decision-making, failure or success in fundraising isn’t necessarily a reflection of the size or focus of the manager, Stackler said. “There’s capital flowing to lots of different kinds of managers,” he added.
Limited partners “have become more aggressive on the fees and governance side,” while also focusing more on covenants relating to overall leverage ratios and the cross-collateralisation of properties, said John Noell, a partner at law firm Mayer Brown. Much discussion has revolved around what limits there should be on cross-collateralisation activities when funds look to finance portfolio acquisitions partially with debt, he said during the panel, which was moderated by The Carlyle Group managing director Alok Gaur.
Rather than cutting fees and making other concessions to LPs, a better approach for fund managers is to “create a sense of scarcity and urgency,” said Stackler. Having solid deals lined up for a fund “helps a ton,” as does setting a fundraising target that is in line with deal flow, he noted.
Another panellist, Ione Permison, managing director and global co-head of the real estate fund of funds programme at Quilvest, said she still believes that “fund of funds will be able raise capital,” despite some potential consolidation in the fund of funds industry. Such funds will become more attractive to investors, given that the much larger universe of small funds trying to raise capital today will require a greater level of diligence. However, she noted the particular challenges of first-time funds looking to attract investors, many of which now “have morphed into club deals.”
When asked why it is easier to raise a fund in Brazil than a US distressed real estate fund, Permison responded that “the opportunity and deal flow are clearer” in Brazil and there are a relatively small number of funds. Although it is clear that there are distressed opportunities in the US, “deal flow has been slow to come out” and there are “zillions” of funds trying to raise capital in that space, she explained. That is starting to change, however, as more distress is coming out of the system, she noted.
Certain types of funds have been particularly attractive to LPs, according to Anthony Frammartino, a partner at real estate investment consultant The Townsend Group. “Debt strategies are competing with a lot of the core funds” for capital, he said. Indeed, mezzanine debt funds “have gained much more attention from investors.”
For managers, it also helps “to communicate early and often,” said Frammartino. “Clearly, those relationships matter.” Ultimately, success in capital raising “comes down to how flexible managers are willing to be with their vehicles,” he added.