By Peter Grant
Investors are pouring more money into real-estate funds than
they have since the property bust, but a few giant fund firms are
collecting the lion's share of the spoils.
Pension funds, endowments and other big institutional investors
are putting more cash into private-equity firms with large
real-estate funds and strong track records, leaving smaller firms
to fight over the scraps.
"That expression 'A rising tide lifts all boats'--that's not the
case here," said David Hodes, managing partner of real estate
consultant Hodes Weill & Associates.
Investors are putting more money into real estate in search of
better returns than they can get from bonds. At the same time, some
investors are reducing the number of funds they hold, helping
improve their bargaining power on fees.
"Many investors found that adding new funds and new strategies
did not ultimately improve performance, and might have gone the
other way because it was a significant drain on resources," Mr.
Hodes said.
Overall, 210 global closed-end funds raised a postcrash record
$97.7 billion in 2014, up from $95.5 billion in 2013 and $46.8
billion at the bottom in 2010, according to data tracker Preqin.
Funds pulled in a record $137.5 billion in 2008.
But most of the new haul is going to big funds. Overall, funds
of more than $1 billion have accounted for 64% of all the capital
raised so far this year, more than twice the 31% they accounted for
in 2012, according to Preqin.
Big firms' success reflects their relatively strong performance
during the downturn, when many other funds, particularly those run
by big U.S. banks, such as Lehman Brothers Holdings Inc., Morgan
Stanley and Goldman Sachs Group Inc., performed poorly.
Blackstone Group LP, the industry's fundraising leader, earlier
this month reported annualized returns of 18% after fees for its
seven real-estate funds launched since 1994, not including the one
that just closed. The New York firm raised $14.5 billion for its
most recent fund, surpassing its target.
Starwood Capital Group recently raised $5.6 billion, ahead of
its goal. Lone Star Funds this week closed on its latest fund,
raising $5.5 billion, $500 million more than targeted, according to
people familiar with the matter.
With the bigger war chests, the funds have gone property
hunting. Notable recent deals include Blackstone's purchase of the
Willis Tower in Chicago; Starwood's acquisition of a stake in the
Sol Principe hotel in Malaga, Spain; and Lone Star's purchase of
the Jurys Inn hotel chain, based in Ireland.
By contrast, midsize funds between $500 million and $1 billion
accounted for 17% of the total capital raised so far this year,
down from 29% in 2012, according to Preqin.
Another measure shows a similar pattern. Global funds that have
raised more than $1 billion since the beginning of 2014 hit 109% of
their targets in an average of 14 months. Smaller funds took 20
months and hit only 97% of their targets, Preqin said.
For U.S.-focused funds, the difference was even more dramatic.
Funds over $1 billion hit 113% of their goals, while funds of less
than $1 billion hit only 96% of their targets, Preqin said.
Some smaller, niche funds that specialize in certain types of
property or geographies are doing well. Such funds raised $18
billion in 2013 and the same amount in 2014, compared with $11
billion in 2011 and $12 billion in 2012, Preqin said.
Kayne Anderson Real Estate Advisors of Boca Raton, Fla., is
expected to close soon on a $1 billion fund focusing on medical
office buildings, student housing and senior housing, while
Chicago-based LaSalle Investment Management has hit its targets on
three funds in the $300 million to $400 million range focused on
the Japanese logistics industry.
"The ones that are successful are either the very big guys or
smaller funds," said Andrew Moylan, head of real-estate funds for
Preqin. "If you're just trying to say, 'We're trying to raise $500
million for a pan-U.S. diversified fund,' it's very difficult."
The trend in real estate fundraising differs from the broader
private equity world, a reflection of how severe real estate losses
were after the bust. The major players in private equity haven't
changed much. According to Dealogic, the same firms were in the top
five in terms of total global deal value in 2007 and 2014: KKR
& Co., Blackstone, Carlyle Group LP, TPG Capital LP and Goldman
Sachs Capital Partners.
But in the real-estate business, the cast of characters has
changed. Many of the firms that used to be the top players have
either failed haven't raised commingled equity funds since the
downturn, such as Goldman's Whitehall Funds.
Big-name private-equity firms that launched real estate
businesses after the bust, like KKR and TPG, and can't point to a
long-term track record, have had to tailor their fundraising
strategies to the tough climate. KKR was able to close its first
post-crash fund late 2013--to the tune of $1.5 billion--after
committing $500 million of its own capital, an unusually large
amount. TPG began raising its first real-estate fund early last
year--with a target of $1.5 billion to $2 billion--and hasn't
closed it, although it has raised more than $1 billion, according
to people familiar with the matter.
Meanwhile, some established private-equity players before the
crash have scaled back their fundraising. For example,
Philadelphia-based Lubert-Adler just closed its first new
commingled fund since the downturn, raising $575 million. Its last
fund before that, which closed in 2007, was $2 billion.
Dean Adler, the firm's chief executive, said it set its
fundraising sights lower because its focusing these days on
redevelopment deals in the $25 million to $100 million range that
require a lot of execution skills.
"You have to size your fund to the opportunities you're
pursuing," he said.
Write to Peter Grant at peter.grant@wsj.com
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