Private Equity CRE Deal Making Poised for Comeback

While COVID-19 threw a wrench in private equity real estate dealmaking and fundraising last year, investors are optimistic that deal values and volumes will pick back up in 2021, according to Preqin.

As of June 2020, assets under management exceeded $1 trillion, up 4.7% since December 2019 and an increase of more than 40% from five years ago. But fundraising in particular was hard-hit by COVID-19: in 2020, 283 funds closed at a value of $118 billion, a significant decrease from the year prior, when 494 funds closed and $179 billion was raised.

The ten largest funds secured 34% of the capital raised last year, when 5,979 deals closed with an aggregate value of $221.6 billion. Transaction numbers declined 39% and aggregate values decreased by half across all sectors.

Despite this, however, investors remain somewhat positive: 36% expect to increase allocations over the next 12 months, according to Preqin, but one in five survey respondents do expect returns to deteriorate over that same period. That’s a larger proportion than any other alternative asset class, and Preqin attributes that gap to either the lack of repricing across other assets or the potential for higher interest rates to eat into returns.

If that happens, pricing will be negatively impacted and the yield differential to other assets may tighten—though real estate assets may be somewhat protected by inflation protection for income streams, especially when it comes to long leases.

When deal activity picks back up, Preqin expects industrial and core-quality office assets will be in greater demand than retail, which will not likely return to favor in 2021. Hotel valuations are also poised to pick up one tourists return to gateway cities.

“Restrictions on travel, lockdowns and reduced physical interaction among market participants hit fundraising and played a major part in deal declines,” said David Lowery, head of Research Insights at Preqin, in prepared remarks.  “However, large funds continued to come to market and close last year. And when deal activity does recover, office and industrial, key sectors that generate interest from allocators, should benefit. But with dry powder standing at a record $324 billion, fund managers and investors could face an increasingly competitive environment in the year ahead.”