Real estate private equity funds were not a new investmentcapital source at the start of this decade, but few expected theglobal explosion in capital raising that happened during the firsteight years. During the formative years of the modern real estateprivate equity fund industry, from 1990 to 1999, the total raisedby funds was just shy of $125 billion. Most of the capital flowinginto real estate PE funds during those years actually came between1997 and 1999 when funds took in more than $69 billion. But theneverything changed.

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From 2000 through 2003, according to industry publicationPrivate Equity Real Estate, the industry averaged inflowsof more than $37 billion per year, but, in 2004, real estateprivate equity came of age when investors pumped $84 billion intothe sector. Between 2004 and 2008, investors poured more than $625billion into private equity funds.

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Sometime in early 2008, the sector officially topped $1 trillionin raised capital since 1990. What happened? Real estate was in anextraordinary up-cycle. Pension funds and other investors wereadding real estate to their broader investment strategies orexpanding their existing allocations, and private equity funds gavethem the opportunity to invest large sums at attractive returns.The capital began to flow freely and this, combined with realestate emerging as a global asset class, shifted the sector intohigh gear.

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It is easy to forget that the globalization of commercial realestate by Wall Street and large private equity houses was alreadywell underway by 2000. But it clearly was the combination of theappeal of cross-border investing and the application of Wall Streetand private equity capital raising expertise that caused thedramatic increase in the numbers.

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Global expansion of the industry had begun as early as the mid1990s, when the first global funds were formed. By early 2001,those funds and others that followed were attracting institutionalcapital seeking, among other things, diversification. Asinformation on major overseas markets became more plentiful,transparent and reliable, cross-border capital flows actually beganto occur in both directions, as did the deals.

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In the past 10 years, we have seen German funds investing notonly in Europe but in the US, in Latin America and in Asia. USfunds have routinely traveled anywhere in the globe where there wasopportunity, Asian funds to the US and so on. The steadilyincreasing size of these funds over the past decade, along withlarge investment banks either financing independent funds orforming their own, allowed cross-border activity to reachunprecedented levels quickly. Even the most conservative funds inEurope were now willing and able to invest in properties in India,the US and China, and the same could be said for US sponsorslooking at overseas opportunities.

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Beginning with Wall Street’s success working with and advisingthe Resolution Trust Corp. in the early ’90s, the potential of realestate private equity funds became obvious. Bankers quicklyrecognized the advantages of identifying and investing in bothproblem properties as well as core assets through the privateequity vehicle. This recognition quickly transformed a good ideainto a global movement.

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As the sector matured, these funds attracted a broader universeof investors who realized they offered a variety of strategies:asset specific, geographic, sector specific, etc. They alsorealized that the funds were a good diversification tool forinvestors looking to spread risk. As the money came easier, so didthe decision to pay higher prices and use more leverage.

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Fast forward to 2008, when the first phase of the modern era ofglobal real estate private equity finally caught its breath. Thepush was not immune to the global financial meltdown. In fact, thedownturn may have hit some sectors of the real estate privateequity industry harder than most. In the 12 months following theheight of the downturn, many funds, but not all, suffered fromheavy losses, dealing with investors seeking return of capital andsponsors forcing to slash promotes, their share of a fund’sprofits, to appease investors as well as face the specter of“clawbacks,” the right of limited partners to reclaim a portion offunds paid to the general partner for earlier investments to offsetLP losses from later fund investments.

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Legacy issues at existing funds forced managers to reassess andprioritize their assets, getting back to basics at the propertylevel to create value. Funds have had to work extra hard to nurtureand sustain relationships with their investors during these tryingtimes.

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The last two years has been challenging for private equityfunds, as they have for all in real estate. Looking ahead, it isimportant to put the downturn into perspective. The real estatesector has come through a major test, and, though not unscathed, ithas survived. More important, it has adapted. Because of thedownturn, the fund model has experienced some changes, and we areseeing more institutional investors looking to plan joint venturesand separate account-type investments directly with real estateoperators.

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Today the real estate private equity fund industry is afundamental component of our global real estate capital market, atrillion dollar industry. In 10 years, when Globest.com’s editorscircle back for a comment on the past 20 years, I’m fairlyconfident that someone, perhaps even I, will be writing about thenext great phase in the global real estate private equityindustry.

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Howard Roth is the Global RealEstate Leader and a partner with Ernst & Young LLP’s RealEstate practice. You may contact him at [email protected]. The viewsexpressed herein are those of the author and do not necessarilyreflect the views of GlobeSt.com or Ernst & Young LLP.

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Howard Roth

As the Global Real Estate Leader, Howard coordinates the firm's activities across a broad array of related services around the world. EY has the largest integrated real estate practice of any Big Four firm, with more than 7,500 professionals around the world providing audit, tax, transaction and advisory services to owners, builders, lenders and users of real estate. EY serves more than 4,000 real estate clients throughout the world. Howard brings more than three decades of experience in the real estate industry. He has worked extensively with major real estate private equity funds, domestic and offshore real estate investment trusts and large public homebuilders, as well as numerous construction and hospitality companies. His credentials include a BA in Accounting from Hofstra University. He is a member of the American Institute of Certified Public Accountants and New York, New Jersey and Connecticut Society of CPAs, has been a columnist for several major industry publications and is frequently a speaker at key real estate industry events.