In late January, Michael Fascitelli, chief executive officer of Vornado Realty Trust, underscored one of the predicaments facing private equity real estate funds today given the tough fundraising environment.
With the US institutional investment world largely on its “butt”, fewer dollars are winging their way into the blind pool pockets of GPs. Indeed, anyone trying to raise a commingled fund can expect to be at the effort for multiple years. However, as Vornado itself reportedly tries to raise $1 billion for the office and mall private equity real estate vehicle, Vornado Capital Partners, Fascitelli told one New York real estate conference that it would take him no more than two days to raise the same amount on the public markets.
After raising $34.7 billion in fresh equity in 2009, and another $10.4 billion in the first three months of 2010, US REITs are on a fundraising roll. They moved quickly to raise equity in 2009 to help delever their balance sheets and are now positioning themselves to start investing again. In comparison, value-added and opportunistic private equity real estate funds raised $30.4 billion and $4.4 billion in 2009 and during the first quarter of this year, respectively, much of it having been raised pre-credit crunch.
This fundraising disconnect is prompting some private real estate fund managers to eye the public markets with envy.
Of course, the interest among opportunity fund GPs in sponsoring REITs is well known. Starwood Capital Group, Colony Capital and Apollo Global Management priced blind pool mortgage REITs in 2009, only to find the window of opportunity was considerably short-lived as public appetite for blind pool vehicles waned in the wake of the first IPO.
|  This fundraising disconnect is prompting some private real estate fund managers to eye the public markets with envy.
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Now though private fund managers are exploring another public avenue: portfolio IPOs.
Howard Roth, global head of real estate at accountants Ernst & Young, said several private equity real estate firms were looking to “roll up” assets from one or a number of funds into publicly-traded REITs. “It’s definitely an idea that’s percolating,” he said.
Part of the thinking is that many of these private portfolios, built during the climb to the top of the market in 2006 and 2007, are in need of potential equity recapitalisation and a public REIT may be a good place to meet that objective given the greater ease of access to relatively inexpensive capital available through public markets. And with REIT prices trading at a 20 percent premium to their estimated net asset value, according to consulting firm Green Street Advisors, the ability to arbitrage the two markets may prove too hard to resist.
| Private portfolios, built during the climb to the top of the market in 2006 and 2007, are in need of potential equity recapitalisation and a public REIT may be a good place to meet that objective. |
But as Roth noted, aggregating fund assets into a REIT IPO is no easy matter. Between sorting out the accounting, taxation, valuation and regulatory issues, listing a new REIT can take anywhere from six months to a year, and cost a fair penny to boot. “This is a process that takes significant time, effort, and energy to bring a new company to market,” Roth explained.
By the time GPs have organised their public listing, the private equity real estate industry may well have risen out of the fundraising quagmire it currently finds itself in. At their peak in 2006, US REITs raised just $49 billion in new equity, compared to the $85.2 billion corralled by value-added and opportunistic private equity vehicles in 2007.
In trying to find a fix to their current capital raising problems, private fund GPs may well be hitting on a temporary fix.
After all, if Fascitelli can raise $1 billion of equity in two days through the public markets, why is Vornado even trying to raise a private equity real estate fund? The private fund model, for all its faults, remains a compelling investment model in 2010. For those GPs in search of answers to portfolio problems, it may well pay better not to covet their public cousins too much.
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