The aggregate growth of the PERE 100 has slowed during the pandemic as fewer mega-funds hit a final close. Five-year fundraising totals in the ranking climbed just 3.3 percent year-on-year in 2021, substantially lower than the 11.5 percent growth recorded last year.
The slowdown was especially pronounced among the top 50, with aggregate growth falling to 1.9 percent this year from 10.5 percent in 2020.
Blackstone – the long-standing champion of the PERE 100 – witnessed a particularly stark decline, having raised $49.9 billion over the qualifying five-year period, versus $64.9 billion as of 2020.
The industry-wide slowdown can be attributed in part to fewer mega-funds reaching a final close last year, with Blackstone’s $10.9 billion Real Estate Partners Europe VI the only such vehicle to hold a close in 2020. By comparison, 2019 saw closes for the $20.5 billion Blackstone Real Estate Partners IX, the $15 billion Brookfield Strategic Real Estate Partners III and the $8.2 billion Lone Star Fund XI.
This mirrors the bigger picture for the private real estate sector. A total of $242 billion was raised across 480 funds in 2020 while $297 billion was raised across $663 funds in 2019, according to New York-based capital advisory firm Hodes Weill’s research.
But while the aggregate trend reversed, the trend of individual funds growing in size continued. The average fund size for funds that have reached a final close in 2020 increased to $504 million, versus $448 million in 2019. This also indicates that the managers below the biggest names are picking up more capital.
The decline in mega-fund raises is also an indicator of the availability of capital in existing products, meaning managers might not need to return to the market as quickly as before, according to Alfredo Lobo, partner at Hodes Weill. For example, Blackstone has not launched any new mega-funds since Blackstone Real Estate Debt Strategies IV and Real Estate Partners Europe VI in 2019. Both funds were closed beyond target in 2020, piling more dry powder on top of the $20.5 billion Blackstone Real Estate Partners IX, the latest vehicle from its flagship series, which closed in 2019.
Lobo also notes that managers can only introduce a new fund when the previous one in the series has typically been at least 75 percent deployed, a process that has been delayed by the pandemic.
Some managers are also waiting for their portfolios to recover from the crisis before they come back to market. “Raising a new fund requires a manager to provide prospective investors with an update on existing assets and current valuations,” Enrique Cuan, managing partner of capital advisory firm Mercury Capital Advisors, explains. “With the impact of covid-19, portfolios might have performance issues that managers believe could be solved given a bit more time.”
Alternative sectors gain favor
Another element to consider is the pandemic has accelerated a shift from traditional real estate sectors to alternative sectors. Such uncertainty makes mega-fundraises more challenging, as both investors and managers are forced to rethink how their allocation should evolve. Traditionally, offices and retail properties have been the two largest sectors in real estate. Their future is being tested.
“As the pandemic has cast a dark cloud over the office and retail space, investors are pivoting to some smaller or more specialized areas such as healthcare, data center and multifamily. Even student housing is starting to come back. Unfortunately, it’s difficult to deploy large amounts of capital in these sectors,” says Cuan.
According to Lobo, fundraising delays became increasingly common in 2020 as physical due diligence and meetings were put on hold. He noted several of the vehicles that Hodes Weill has been working with have sought fundraising extensions from their investors during the pandemic.
In addition, many investors paused their investment activities in 2020, according to Lobo. One such example was seen in March of last year, when PERE reported that Germany’s biggest state pension provider Bayerische Versorgungskammer placed a four to six-week minimum moratorium on real estate investment decisions as the lockdowns were being implemented. Lobo says some investors, such as those in Japan, paused for even longer.
Despite this, not all funds have struggled to attract capital. Indeed, sector-focused vehicles that address specific investor appetites, such as digital, logistics and multifamily exposure, have moved through the market quickly. Highly ranked GLP, for instance, has taken advantage of this dynamic in the data center space, launching a data center platform in 2018.
“We see continued interest in these sectors, and there is still room for more capital to come in,” adds Lobo.