Chinese investors seem to have dominated private equity real estate headlines as of late, thanks to their deep pockets and seemingly insatiable appetites for US real estate. But for the vast majority of US-focused real estate fund managers, these Chinese institutions do not have much impact on their business one way or another. While some Chinese insurers are starting to look at open-end core funds as a more practical way to invest in real estate than direct transactions, the vast majority of Chinese institutions eyeing US real estate still want to go the direct route.
Meanwhile, many US real estate fund managers are in need of new capital sources. Traditional sources for US funds – particularly US pension plans and insurance companies – often are committing fewer dollars, if any, to commingled vehicles. The California Public Employees’ Retirement System, for example, not only primarily invests in real estate through separate accounts and other non-commingled fund structures these days, it also has proposed reducing its base of managers in the asset class to just 15. Other US pension plans also are following suit.
Those institutions still committing capital to funds show that the herd mentality of investing is still alive and well, as they continue to pile into mega-funds sponsored by a handful of the industry’s biggest names, such as The Blackstone Group, Lone Star Funds and Brookfield Asset Management, the latter of which closed last month on $9 billion for its second global opportunity fund, Brookfield Strategic Real Estate Partners (BSREP) II.
As investors write big checks to these managers, that means fewer dollars, if any, are available from these institutions for commitments to funds being raised by other firms. Some of these firms – also known as the ‘have-nots’ of the industry – are increasingly looking outside the country to help fill the capital void.
One fund formation lawyer told PERE last month about how he has seen an uptick in the last six months of US managers that are developing vehicles that are compliant with the European Commission’s Alternative Investment Fund Managers Directive (AIFMD), for example. Such vehicles would accommodate European investors that could potentially invest in the managers’ US-focused property funds.
Although AIFMD was first drafted several years ago in the wake of the global financial crisis, the implementation of the new regulations in each member country has generally been a drawn-out process, as each nation has had a different interpretation of the rules. The formation of AIFMD-compliant vehicles, however, is a recognition by US fund managers that the regulations are here to stay.
It also reflects the new importance of European investors to some US fund managers. Indeed, one real estate firm that currently is raising its second US property fund told PERE that it is spending more time fundraising in Europe than it did three years ago, and that the region generally represents a new area for the firm to market its funds.
Many Europe-based investors, meanwhile, are eager to deploy capital in US real estate, including through funds. These institutions are understood to view the US as having more of a growth trajectory, as well as having better real estate pricing than many of the major property markets in Europe.
But Europe is not the only region that has become a new source of capital for US fund managers. PERE has also learned that one US fund manager has created a special sleeve in one of its US real estate funds to capture capital from Mexican institutional investors, which are still a rarity among limited partners in US-focused property vehicles.
Mexican pension plans, commonly known as Afores, have been seeking to diversify their investments to reduce risk concentration in any one asset class or geography while gaining access to investment opportunities abroad. Afores were first authorized to make international allocations in 2011, with a 20 percent cap in foreign investments across all asset classes. However, efforts are currently underway to relax that investment limit in international assets to allow more allocations outside of Mexico, including to US real estate.
While Brookfield’s massive equity haul with BSREP II may be disheartening for some of the ‘have-nots’ in the industry, the more adaptable of fundraisers stateside have new reasons to remain motivated on the fundraising trail, having found alternative routes of getting to the finish line.