Mid-sized managers were in the driver’s seat last year. Private equity real estate’s top 100 firms made up for lost time in 2021, following up the tepid output of 2020 by raising their collective five-year capital totals by nearly 20 percent. Much of this growth came despite a relative dearth of mega-fund closings from the industry’s largest firms.
Instead, smaller and medium-sized firms, particularly those with operational expertise or a focus on in-demand property types, were able to capitalize on the swell in investor demand for greater real estate exposure last year.
“There’s been more appetite for middle market, for newer platforms and, in particular, for investor-operators, platforms that have an operating expertise, especially for strategies that have favorable macro fundamentals like industrial, residential strategies and data centers,” says Doug Weill, a founder and co-managing partner at the capital advisory firm Hodes Weill & Associates. “Also, the big funds have gotten so big that investors want to diversify their portfolios to make sure they’re capturing a wider portion of the market, including small and mid-size transactions.”
Sixteen firms crossed the $5 billion threshold in this year’s PERE 100 ranking, a feat achieved by just nine firms in 2021. The newcomers to the $5 billion-plus club added $55.2 billion year over year, accounting for nearly 44 percent of the overall growth of the ranking. The top 16 firms on the list combined for $59.5 billion of added capital.
Of these firms, Pretium Partners, a single-family rental specialist, had the biggest positional jump of the year. The New York-based manager rose to the number 15 spot in this year’s ranking after falling just outside the top 100 in 2021. The firm harnessed the incessant demand for rental homes – which spearheaded a broader rush toward residential strategies writ large – to bring its five-year haul to more than $11 billion.
Pretium credits its fundraising success to its ability to forge new relationships with institutional investors and wealth managers. Both groups were drawn to the platform’s experience as well as the growing uptake of single-family rentals by American households, Jennifer Strickland, senior managing director and head of business development at Pretium tells PERE, particularly millennials that are getting married and having children.
Beijing-based Sino-Ocean Capital also made a barnstorming debut in the PERE 100 this year, clocking in at number 27 after amassing nearly $7.5 billion in the qualifying period. The firm majors in special situations in Chinese residential markets, an area of keen market interest amid the credit default of China Evergrande Group, the country’s second-largest property developer.
Houston-based Hines, one of the top real estate owner-operator-developers in the world, cemented its capital-raising acumen, nearly doubling its five-year haul to $7.3 billion – good enough to clinch the 28th spot. Another longstanding name in the real estate space, Goldman Sachs Asset Management Real Estate, also cleared $5 billion as it re-entered the PERE rankings after a notable absence. Other established managers, such as TPG Real Estate, Rockwood Capital and Greystar Real Estate Partners were also among the groups to cross the $5 billion threshold.
South Carolina-based Greystar, a multifamily specialist that has recently expanded its offering to include industrial and life sciences strategies, raised more than $14.2 billion in 2021 against a target of $6.5 billion, executive managing director Wes Fuller tells PERE, giving the firm $28 billion of buying power when factoring in debt.
Strong demand for residential properties and strategies that cater to demographic trends – such as the aging of baby boomers and workforce migration – bolstered fundraising activity for Greystar as well as other small and medium-sized specialists, Fuller says.
“There has been a shift in investment sentiment, particularly with a lot of uncertainty around the future of office and retail, which historically contributed a much larger share of investment allocation for diversified investment firms, particularly smaller ones,” Fuller says. “Smaller firms are shifting away from sectors with more uncertainty and into sectors that have strong underlying fundamentals with a better ability to hedge against inflation.”
Norfolk, Virginia-based Harbor Group International followed a similar path as it charged into the PERE 100 ranking for the first time. It ranked number 39 with $5.4 billion raised.
Established in 1985 as a manager of apartment buildings, Harbor Group gradually expanded into property investment before eventually managing discretionary funds. It has dabbled in industrial and retail, and it has more than a dozen office assets in its portfolio. But throughout its history it has hung its hat on investing in multifamily, chairman and chief executive Jordan Slone tells PERE.
The firm invests throughout the capital stack, from first mortgages to mezzanine loans to equity. It also invests in commercial mortgage-backed securities and the stock of listed real estate companies. Slone says this approach gives Harbor Group a deep view into the multifamily sector while still allowing it to provide the personal touch investors crave from a firm of its size.
“I have only great things to say about Blackstone. They’re a tremendous firm and they’ve done very well. But at some point, investors like to have a little bit more personal touch with the managers they’re investing with,” Slone says. “Firms like ours really do provide more of that personal touch.”
Moving into the second half of 2022, however, mid-sized market managers will have their work cut out. Blackstone and Brookfield both have flagship funds in the market and the overall fundraising environment is less favorable, as runaway inflation drives up interest rates and tumbling equity portfolios restrict how much capital institutions can deploy into real estate.
Still, Weill believes private real estate’s medium-sized firms will not easily relinquish the footholds they have established during the covid era. Not only are they plied with track records for raising and deploying capital, he said, but they have the advantage of an altered fundraising landscape that skews more in their favor.
“There’s a lot more desktop underwriting before an institution takes an in-person meeting, or goes out to see a manager or conducts property tours, and that means it’s going to be less, in my view, about the cult of personality manager, the big name that has often had the ability to sway with an in-person meeting,” Weill said. “That evens out the market a little bit more and allows the middle-market manager to get more attention than they were getting the past. The underwriting is about track record, strategy and market opportunity.”