In March, The Blackstone Group held a first close for its latest European opportunistic fund, garnering $4.97 billion in commitments from 142 investors in just three months.
The fund, Blackstone Real Estate Partners Europe (BREP) V, has a $6.7 billion target. Its predecessor, BREP Europe IV – the largest opportunistic real estate fund ever to be raised in the region – ultimately raised $8.8 billion.
Eye-watering numbers such as these are, of course, mightily impressive but they also raise several questions about their impact, both directly and indirectly, on the market for smaller or mid-sized fund managers in Europe.
One London-based mid-market fund manager claimed that huge firms such as Blackstone and Lone Star Funds are ‘hoovering’ up commitments across Europe by appearing on the horizon every 18 months. Once investors have clambered into these mega-funds, they only are able to write small tickets for other European funds, if at all.
“Where [Blackstone] really has an effect is in fundraising. So for example, Sovereign Wealth No. 1 would have previously given me €100 million or €200 million, but now only gives me €75 million because they [already] put €250 million into Blackstone,” he said.
US firms’ European funds have succeeded recently because of the massive investment flows out of North America in recent years, as US real estate investors began to invest en masse internationally for the first time.
“There is a lot of capital out there but it doesn’t necessarily know the market well enough,” Robert Stassen, director of European capital markets research at JLL, told PERE. “So the instinct is to put the money with a brand name they can trust. If they decide to go direct, they tend to go to the big markets like London and Paris. If they decide to go indirect, if you don’t know the market well enough to find a smaller operator, you will go to a Blackstone or a Lone Star.”
He also said that due to investor pressure on the cost of investing, smaller funds are finding it tougher to raise capital. He gave fund of funds as an example: “They really have to demonstrate their value to the end investors in order to charge those fund manager fees and those are the typical vehicles which support some of the smaller funds.”
Stassen added: “So in that way you can see for the smaller funds it is slightly more difficult to raise money than for the big Blackstones and Lone Stars. And what we have seen in the fund management industry, and going forward, is consolidation, to create a bigger platform to support these bigger clients.”
However, it is not all doom and gloom for fund managers not raising multi-billion euro funds. One London-based real estate fund formation lawyer told PERE that although the larger firms raise very significant funds, they tend to do it very quickly so they are not in the market for long – meaning that some prospective investors may not be able to get into the fund in time.
He added that most Blackstone investors are putting significant amounts of equity into the fund. Some investors, however, don’t have a real estate allocation large enough that allows them to commit to a mega-fund.
“Blackstone is only one strategy, so some investors may not have big enough check writing abilities to meet their overall indirect real estate portfolio requirements with just one fund commitment,” the lawyer said.
And as Stassen summarized: “It used to be very difficult for the smaller funds to raise money, until say 2013 or 2014, because it was more difficult for them to get access to that capital because they were in a long queue. I think where we are now, we have had two or three years on relatively good conditions for the smaller players, with a good record of raising capital.”