Mega-fund closings underscore a polarizing market

Sizeable closings by private real estate’s biggest managers demonstrate again their pulling power among the world’s top institutional investors

After a distinctly quieter 2017, the mega-fund managers of private real estate came roaring back last month with almost $24 billion of equity reaching final or near final closes.

In the space of four days at the start of the month, PERE reported major closings by Brookfield, Starwood and Blackstone, the aggregation of which eclipsed the top five final closings combined in 2017.

Starwood was first, calling time on a fundraising effort that saw the Miami-based firm attract $7.6 billion from investors for its Starwood Global Opportunity Fund XI. The firm blasted past its $5 billion-$6 billion target and outraised its Fund X by $2 billion.

Days later, Brookfield neared a final close for Brookfield Strategic Real Estate Partners III after two quick successive closings, bringing its total to $9 billion. With a final target of $10 billion, the vehicle is expected to be the biggest to close in 2018.

Not to be outdone, Blackstone, the sector’s biggest post-global financial crisis fundraiser and perennial leader on the PERE50 ranking of private equity real estate firms by capital raised, has kept pace with a final $7 billion closing for its second pan-Asia fund, Blackstone Real Estate Partners Asia II. Like Starwood, Blackstone beat its prior haul in the series by $2 billion.

These three funds have garnered more capital than the biggest five to hold final closings in 2017, including Blackstone’s fifth European fund, Brookfield’s fifth real estate credit fund, Kildare’s second fund and two European funds by logistics specialist GLP.

Polarized market

The closings are demonstrations of a polarizing fundraising market in which the largest institutional investors are increasing their backing of the sector’s largest managers. The California Public Employees’ Retirement System, the biggest US real estate institutional investor, for example, has almost halved its active manager count since the crisis, today backing just 30 managers, but to greater extents than before. Ivanhoé Cambridge, the real estate subsidiary of Canadian pension La Caisse de dépôt et placement du Québec, meanwhile, committed $200 million to BREP Asia I and returned with a $300 million check for its successor.

Investors have been captivated by mega-fund managers’ ability to drive strong returns in a low-yield environment. Starwood’s Fund VIII and IX are regarded top quartile in their vintages, projecting net IRRs of 13 percent and 24 percent and equity multiples of 1.6x and 1.8x respectively, according to documents from US pension Connecticut Retirement Plans and Trust Funds.

BSREP I, meanwhile, generated a net IRR of 19.5 percent and 1.6x multiple, while the more recent BSREP II had already returned its equity, generating a 1.1x multiple against a 12 percent IRR, per November documents from consultancy NEPC. Blackstone’s BREP Asia I is generating IRRs north of 20 percent, one of its investors told PERE.