Serving up specialization

Is the end nigh for private equity real estate global vehicles? Certainly not, but if delegates attending the PERE Forum: Europe 2008 were to take home one compelling thought from the conference it was that global opportunistic funds are about to face some tough challenges in the years ahead. The Partners Group's chief strategist for real estate Nori Gerardo Lietz best summarized the issue when she told the audience in London last month that investors were becoming increasingly choosy over where they deployed their capital. Limited partners, she said, were looking more to specialized regional funds – particularly in the emerging markets – rather than to their larger, more global, rivals. Big was not necessarily beautiful, according to one LP.

As the credit market dislocation shows only too well, the world is truly global. Capital flows take no heed of geographic boundaries, a point Dave Keating demonstrates in his special report on Russia on p.34. Once described by Winston Churchill as a “riddle wrapped in a mystery inside an enigma,” Russia is benefiting from rising oil prices and a more stable political economy. Its growing appetite for good quality real estate has proved a boon for private equity real estate, with increasing amounts of capital – and dedicated real estate vehicles – being focused on the country.

But specialization is not just about geography, real estate fund strategies – and the sectors they invest in – are also becoming increasingly specialized, as our feature on leisure on p. 38 illustrates. As rising incomes and a growing middle class accelerate demand for leisure-related real estate, private equity real estate investors are eyeing bigger and better opportunities to capitalize on the trend.

One fact is clear though, as investors start targeting more specialized, regional funds – and start actively managing their asset portfolios – the real estate secondaries market will become more robust. Last year, there was an estimated $1 billion of trades. Within the next two years, according to one US placement agent who spoke to PERE for our secondaries feature on p. 26, that could increase five-fold to around $5 billion.

Yet despite increasing attention on specialized funds, no one is anticipating the end of the global real estate opportunistic funds as we know them. Indeed, as our interview with chief executive officer David Blight demonstrates, ING is one investment firm intending to capitalize on such a strategy with its recent launch of a global platform. ING says it is responding to investor appetite. And while some limited partners are certainly becoming more selective in their investments, strong global strategies will still be a force to contend with.

Enjoy the issue,

David SnowDavid.s@peimedia.com