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Already Sitting On Billions of Uninvested Dollars, Fund Managers Back Off Capital Raising Efforts

Fewer Private Real Estate Funds Closing as Managers Have Record Amounts of Dry Powder
July 15, 2015
A buoyant fundraising market has provided managers of closed-end private real estate funds with an interesting dilemma: where to invest $254 billion in uninvested money already raised from investors.

Unspent, real-estate-committed capital is up 37% from the $185 billion in December 2014, reaching the highest amount on record, according to Preqin, which provides data and research on alternative assets for institutional investors.

The majority of dry power is focused on North American real estate, with $133 billion in already-raised but unspent money allocated for the region. Comparing investment funds by strategy, opportunistic vehicles are sitting on the largest amount of investment capital, with $100 billion available to invest globally.

As a result of the increase in uncalled capital available to private real estate fund managers, the pace of fundraising has slowed with fewer funds getting closed.

"The level of uncalled capital available to real estate fund managers to invest has hit a quarter of a trillion dollars for the first time ever," noted Andrew Moylan, head of real assets products for Preqin, calling it a reflection of increasing institutional investor confidence in real estate.

"However, with increasing valuations and intense competition, finding attractive opportunities to invest this capital in the coming quarters is likely to be a difficult prospect,” Moylan added. “Fund managers will have to work hard to find value in an increasingly crowded marketplace."

That crowded marketplace includes 416 private real estate funds currentlly in market competing for institutional commitments. The funds are seeking a combined $149 billion in capital.

While private equity real estate fundraising has been strong ever since interest rates dropped, fewer property vehicles have been closing each year over the past several years, according to separate quarterly statistics from PERE Research & Analytics.

The number of property funds with final closes in 2015 year-to-date is on track to be the lowest since 2010.

PERE’s research revealed that 97 real estate funds have been raised globally during the first half of 2015. At this rate, less than 200 funds would close this year, which would be the lowest number of final closes for property funds since 2010, when 182 final closes occurred. By comparison, 263 capital raises were completed in 2011, 295 in 2012, 293 in 2013 and 245 in 2014, PERE Research & Analytics said.

Preqin highlighted additional details. In the second quarter of this year, 47 real estate funds closed securing an aggregate $26 billion, bringing the 2015 total so far to $60 billion.

22 North America-focused funds raised a combined $10.3 billion in the second quarter. 11 European offerings raised $12.8 billion. A total of $2.5 billion was raised by Asia-focused funds and $400 million by funds investing across other regions.

The average time taken for private real estate funds to reach a final close in the second quarter rose to 21 months, up from 19 months for funds closed in 2014.

62% of funds reached or exceeded their target size in the second quarter of 2015, compared to 60% in 2014 and 55% in 2013.

Lone Star Real Estate Fund IV was the largest fund to close in 2015 after securing $5.8 billion for global opportunities, making it the ninth largest real estate fund of all time.

Other Notable CRE Fundraisings

ALTO Real Estate Fund completed the third round of fundraising for its second fund, ALTO Fund II, which is expected to ultimately total approximately $125 million. Headed by Co-Founders Mody Kidon and Yaniv Melamud, ALTO Fund II includes capital commitments from Ayalon Insurance Group, Gilad Pension Fund and the provident fund of I.B.I. Investment House, which led a large consortium of other institutional entities, whose capital it manages through the subsidiary Amban. ALTO Fund II has acquired nine properties valued at $156 million with a total area of about 1.6 million square feet. The fund is set to acquire two more properties located in California and South Carolina within the next month.

Avanath Capital Management, a private real estate investment manager, held final close for Avanath Affordable Housing II Fund, completing its $200 million capital raise, according to John R. Williams, president and CIO. Avanath buys and operates affordable and workforce housing, with a focus on supply-constrained markets. According to Williams, the fund is comprised of 10 investors, including three state pension funds, two banks, three insurance companies, one foundation and one family office. Avanath Affordable Housing II has already invested in 13 affordable and workforce multifamily assets in Southern California; Northern California; Washington D.C. metro; New York City metro; Orlando, Florida; Naples, Florida; and Cary, North Carolina.

North Carolina-based Bell Partners Inc., a major apartment investment and management company, completed the final close of Bell Apartment Fund V, LLC with $425 million of total equity commitments. The fund will buy multifamily properties across the East Coast, Southwest and Western U.S. The fund's investor base is comprised of institutional investors and accredited high-net-worth individuals, many of whom invested in Bell's previous funds.

Pearlmark Real Estate held the initial closing of its fourth high-yield investment fund, Pearlmark Mezzanine Realty Partners IV LP. Pearlmark is targeting a fund size in excess of $300 million with a hard cap at $500 million. Mezz IV is targeting a range of CRE assets through a variety of debt offerings, including mezzanine loans, the subordinate interests of A/B structured loans, preferred equity, and whole loans including bridge financing. In addition to backing from institutional investors and high net worth individuals for Mezz IV equity commitments, Pearlmark has complemented its investment strategies and program through its recently announced strategic partnership with Resource America, Inc., an asset management company specializing in real estate and credit investments.

Ten Largest Global Direct Real Estate Funds Managers

Firm, Country, AUM US$ (Dec. 2014)
CBRE Global Investors, United States, $82.1 billion
Blackstone, United States, $80.86 billion
TIAA-CREF, United States, $63.19 billion
UBS Global Asset Management, Switzerland, $60.07 billion
AXA Investment Managers, France, $55.45 billion
LaSalle Investment Management, United States, $55.35 billion
Hines, United States, $50.75 billion
Principal Global Investors, United States, $48.14 billion
J.P. Morgan Asset Management, United States, $44.09 billion
Cornerstone Real Estate Advisers, United States, $42.91 billion
Source: Towers Watson
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