We repeatedly are told that we live in an age of austerity, where sacrifices must be shared as much of the world comes to grips with the excesses of the past. From Greece, Ireland, Portugal and Spain to the UK and US, few countries can expect to be spared the tough decisions ahead.
The world of private equity real estate fundraising is no different. After two years of minimal LP activity in the US, particularly in terms of new commitments to value-added and opportunistic vehicles, it is clear to see that real estate fundraising has entered its own age of austerity as investors scrutinise every investable cent like never before. As GPs look ahead to 2011, they understand only too well that commitment levels over the next 10 months are unlikely to double, triple or quadruple from the roughly $25 billion of equity raised last year.
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| Zoe Hughes |
However, given the increasingly puritanical nature of LPs in terms of fund commitments, can such targets actually be realised?
When Lone Star launched fundraising efforts for its second dedicated real estate vehicle in early 2009, the Fort Worth, Texas- based firm set an ambitious target of $10 billion – up from the $2.5 billion garnered for its debut property fund. By the summer of 2010, that target had been lowered to $4 billion, with a hard cap of $5 billion, while the firm’s fee structures and governance procedures were made more “LP friendly”, according to the documents of two US pension plans. Should it meet expectations for a final close on $4.2 billion this May, Lone Star will have succeeded in raising one of the largest commingled real estate fund of the post-Lehman Brothers era during two exceptionally brutal fundraising years. Despite that achievement, it would be easy to call Lone Star’s experience “wounding”, as one advisor put it.
According to Richard Anthony, head of Evercore Partners Private Funds Group, part of the issue facing GPs is that 2011 could see a “severely congested fundraising market” when it comes to raising capital for alternative asset classes, including real estate. “There will not be enough capital to satisfy all the demand, that’s a certainty,” he said at a recent breakfast meeting. As such, he cautioned that fund sponsors – particularly those raising funds of $3 billion or more – would need to show greater “humility” when it comes to their targets.
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But in revealing it was preparing to come back to market with a new vehicle, Blackstone was setting the stage for BREP VII’s fundraise later this year. There may be limited LP dollars in the system, particularly from US public pension plans, foundations and endowments, but that doesn’t mean GPs need to share equally in the fundraising sacrifices that need to be made. By getting the word out early, Blackstone has put down its markers for BREP VII, securing LP interest in a vehicle that is unlikely to launch for as many as six months.
And that could be the key to fundraising success in 2011 and beyond: getting ahead of the crowd now. Already, the number of new funds coming to market is rising from the lows of 2009 and early 2010. As LPs start to slowly eye moving back up the risk spectrum and away from core, savvy value-added and opportunistic fund managers will take the initiative and try to be seen as the industry’s front-runners. Following the herd and getting lost in the masses is not an option.
Of course, in being front and centre, the issue of fundraising targets becomes even more key. Underestimate the target and investment staff could be left wondering why they should work twice as hard for the same, if not less, carry. However, overestimate the target and a GP could suffer the humiliation of reducing its hard cap, bruising its reputation not only with its LPs but also with its employees.
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