AMERICAS NEWS: Same fund, but different

Back in March, The Blackstone Group closed on $14.5 billion of institutional capital for its latest global flagship property fund, Blackstone Real Estate Partners VIII. The New York-based private equity and real estate giant also had lined up commitments of $1.3 billion from retail investors, but that portion of the fund was still weeks away from closing as of press time.

That dual timetable is just one indication of how raising capital from the high-net-worth channel can be very different than securing institutional commitments to the same fund. Real estate manager interest in retail investors “is as high as it's ever been,” said Robert Klein, global head of alternative investments at JP Morgan Private Bank, which has funneled between $3.5 billion and $4.5 billion of high-net-worth capital into real estate funds over the past five years.  

Indeed, Blackstone was far from the only sponsor to have sought out high-net-worth investors – which typically are defined as individuals with at least $1 million in liquid financial assets. Starwood Capital Group and Lone Star Funds, for example, are also said to have tapped into this channel for their own hugely successful funds that closed this year. 

That interest has largely been driven by the need for limited partner diversification. “In the last downturn, one of the lessons that the general partner community learned was you don't want to be over-reliant on one type of investor versus another,” said Klein.

As one fund manager that works with JP Morgan Private Bank recalled: “During the global financial crisis, family offices and high-net-worth individuals were some of the few aggressive investors wanting to make opportunistic investments.” Their higher-risk stance had a lot to do with JP Morgan's investment philosophy at the time, which was to invest in opportunistic funds during times of dislocation. 

But even in the current fundraising environment in which some vehicles have closed significantly oversubscribed, managers continue to raise capital from the high-net-worth channel to maintain the relationship – not just with retail investors, but with the bank itself. Aside from providing access to high-net-worth capital, the bank also fulfills multiple other functions for the manager, including sourcing transactions and providing debt.

Meanwhile, “investor interest in the high-net-worth and ultra-high-net-worth arena in real estate funds is materially higher today than it was five years ago,” pointed out Klein. Many of these investors remain “woefully underallocated” to real estate, which can offer them inflation-protected cash flow, diversification and low correlation to other asset classes within their portfolios. Generally, the private bank recommends that clients invest about five percent of their assets in real estate and other real assets.

Private banks can take different approaches to aggregate high-net-worth capital for property funds, noted Klein. In the case of JP Morgan Private Bank, it first determines what real estate strategies to pursue, and then spends at least six months to a year conducting a manager search, performing due diligence on multiple managers before selecting a single manager to recommend to clients. JP Morgan typically brings only one or two real estate funds to their clients a year. 

“I don't hold bakeoffs for real estate funds to come in,” Klein said. “It's much more about where do I want to be, what kind of funds do I want to go after, and then approaching the GP, rather than waiting for them all to pitch us as if we're a distribution agent.” 

While the manager search process is lengthy, the actual period of time when a fund is being introduced to high-net-worth clients only spans four to six weeks. After that, the bank puts together a conduit vehicle through which its clients can invest in the fund, as a way of protecting their anonymity. “It's the easiest capital that you can raise out there,” said the fund manager. “I could never raise $500 million to $700 million in three weeks. But it doesn't take them very much time.”

While Blackstone is said to have used multiple private banks to tap into the high-net-worth channel, others are known to work with only one. Sponsors also can vary widely in terms of when in the fundraising period they work with retail investors.

“You need to be extraordinarily specific about where you want to invest at this point in the cycle,” added Klein. For example, one strategy that JP Morgan currently favors is US office in major markets where leverage is constrained.

But he added: “Even if there's a turn in the cycle, I don't see a turn in the trend of real estate investing.”