Across the globe, property fund managers have been getting bigger. Megafunds launched by industry giants such as The Blackstone Group and Lone Star Funds have dominated the private equity real estate landscape in recent years. In fact, so much so that 55 percent of the total funds raised over the last five years for opportunistic or value-add strategies was accrued by the top ten largest firms according to PERE research.
But, as the biggest get bigger, the industry has been on a consolidation trend.
According to joint research from real estate trade associations INREV, ANREV and NCREIF, one in five fund managers say they have been involved in M&A activity over the last 10 years. In Europe for instance, Savills Investment Management (Savills IM), the London-based real estate investment management business of property services firm Savills, completed the acquisition of the Europe and Asia-focused real estate investment manager SEB Asset Management for up to €21.5 million in cash last September.
Investor preferences are the driving force behind the consolidation, said INREV, as the world's largest pools of capital are increasingly looking for global exposure from a one-stop-shop. This has been a key driver of acquisitions as fund managers look to bring in more local market expertise. European fund managers, which often run country-specific strategies, are getting nervous for their futures.
In fact, as many institutional investors continue to consolidate their manager bases, certain smaller firms have told PERE they are struggling to get commitments from many of their existing investors going forward.
Speaking at the PERE Europe Summit 2016 last month, panelists said that a brand name has never mattered more than it does now among fund managers. In response, many firms are opting to put themselves up for sale to become a part of a larger platform in order to survive or become more competitive.
But it is not all doom and gloom for smaller sized real estate investment managers.
The PERE 2016 panel also said there will always be space for specialist firms as investors look to bolster returns in either certain geographies or sectors.
Take, for instance, Dublin real estate manager Ardstone Capital. The firm launched Ardstone Residential Partners, its first residential vehicle, in December and collected €110 million from four investors in the first close. Ardstone focuses solely on homebuilding around Dublin.
There will also always be good-quality property professionals looking to break out of the biggest firms and make their own way in the world. London-based real estate investment manager Mercer Real Estate Partners, held a close at £200 million ($287 million; €264 million) on its debut closed-end commingled fund earlier this year. The firm, established in 2010 by Brandon Hollihan and Michael Kovacs, who previously worked at New York-based real estate investment manager Westbrook Partners, began by working on a deal-by-deal basis with investors before raising the fund.
In addition, many investors, and certainly smaller ones or those that are new to the space, are not big or well-known enough to squeeze into the megafunds and so will have continue to invest in smaller vehicles in order to gain exposure to the asset class.
They also may not be able to move fast enough for the larger players, which, despite raising very significant funds, tend to do so very quickly so they are not in the market for long.
Smaller funds may also appeal to other investors have no chance of negotiating with megafunds on fees or other incentives, such as a seat on the limited partners advisory committee, and yet want to have more favorable terms. Also, for those investors looking for co-investments, the smaller fund managers can make sense as they don’t have the firepower of a megafund to write the biggest tickets for transactions and therefore are more willing to welcome a club of co-investors.
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