Private equity (PE) real estate funds are still struggling to raise capital in the current economic environment.
The second quarter of 2009 saw 21 real estate funds close, with an aggregate commitments of $10.3 billion (Dh37.83bn). This is the lowest fundraising quarter for private equity real estate funds since Q4 2004, when they raised $10bn, according to a new report by Preqin.
Clearly fund managers are still struggling to complete fundraising and institutional investors are still hesitant to commit capital, it added.
As per analysts at Preqin, "although achieving a final close remains challenging, we have seen managers adapting to the conditions, and there is an increasing trend of funds holding more interim closes as managers prepare to stay in the market for longer in order to reach their targets".
As a result, the data in the report showed, there is still fresh capital entering the asset class, and fundraising is therefore not quite as bleak as the headline figures suggest. Of the 374 funds on the road, 138 have already held an interim close, it stated.
The main reasons citied for this difficulty in fund raising is the global downturn, which has forced many investors to review their investment portfolios and reconsider their allocations to private equity real estate.
Returns for the asset class have taken a big hit, with one-year horizon internal rate of returns (IRR to December 2008) of minus 39.9 per cent being the worst in the private equity industry. This has had a significant influence on investors' decisions to commit to the asset class and caused many to approach it very cautiously.
According to Preqin figures, the number of funds on the road has actually decreased since Q1 2009 and the total amount targeted by funds on the road has decreased by $28bn over the past three months.
"This is a result of fund managers reducing their fundraising targets, and in some cases shelving or abandoning their funds altogether. This reduction in the number of new vehicles in market may actually go some way in reducing the competitiveness of fundraising, and may benefit those seeking institutional support for their new offerings with proven strategies and a good track record to rely on."
However, there has been growth in the debt and distressed market. "The year 2009 has seen a growth in debt and distressed focused real estate strategies."
The slowdown has resulted in a number of real estate managers, operators and owners becoming distressed, and therefore having to refinance projects, sell off properties, or default on loans.
To take advantage of this market, distressed and debt focused firms have raised fund sizes and become more active. A number of managers have moved into this area for the first time.
In addition to raising dedicated vehicles, managers of opportunistic funds are also using increasingly large portions of their vehicles to invest in distressed situations.
Historically distressed and debt-focused funds have made up a relatively small part of the overall closed-end real estate market.
However, funds investing in debt and distressed areas are well suited to the current economic climate, and now make up a significant part of the fundraising market.
There are currently 374 funds on the road seeking $199bn, 134 of which will be committing to debt and distressed deals.
It is likely that this will remain a popular strategy with both real estate firms and institutional investors while the economic conditions continue to create an abundance of investment opportunities in this area, said the report.
In addition to the growth of the debt and distressed market, the other big story in 2009 has been the growing interest among institutional investors looking to buy and sell interests in private equity real estate funds on the secondary market.
On the question of when is fundraising going to pick up, analysts at Preqin said although fundraising for private equity real estate funds has been struggling on a global basis, the conditions in Asia and rest of the world have suffered the most.
In Q2 2009, only two funds focusing on the region closed, raising an aggregate $400 million.
Asia and rest of world funds, which were responsible for 25 per cent of the aggregate capital raised in 2008, have accounted for just nine per cent in 2009.
During this time of economic instability, investors are especially cautious when making new commitments, and are therefore in many cases looking towards more established markets, rather than emerging markets which are perceived as being higher risk.
In addition, the popular debt and distressed market is predominantly focused on the developed markets of Europe and North America.
In a survey conducted by Preqin, 84 per cent of investors polled indicated that they would be returning to invest in the medium to long term, with a significant proportion suggesting that they will return to the market in late 2009 and early 2010.
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