Private Equity RE Fundraising Lags

NEW YORK CITY-While private equity real estate fundraising hit its lowest level in nearly six years last quarter, institutional investors are poised to become more active in this sector over the next 12 months than they were in the previous six. That’s one of the key findings in a new report from research firm Preqin, based on a survey of investors conducted earlier this summer.

The report from London- and New York-based Prequin says that only 24% of the 166 investors surveyed made allocations to private real estate funds in the first two quarters of this year. Forty-two percent said they plan to make such commitments over the next 12 months, a figure that rises to 51% among North American investors and falls to 35% among Europeans. Nineteen percent of the respondents said they’re undecided, with the remaining 39% opting to sit out the next year.

“The 19% undecided figure highlights the fact that many investors remain cautious in their attitudes towards new private real estate fund commitments,” according to Preqin’s report. “They are opting to analyze the market and monitor opportunities on an ongoing basis rather than actively seeking investments and formulating concrete investment plans. This contrasts with previous years when the majority were able to predict both the number of funds and the amount of capital they would commit in the following 12 months.”

Given the increased hesitancy among institutional investors, it’s not surprising that the second quarter of 2010 saw the lowest quarterly tally of fundraising—$7.3 billion, led by a $1.8-billion distressed/opportunistic fund from Starwood Capital—since the $6.1-billion total for Q3 2004. It also stands to reason that funds are taking longer to close: 19.7 months on average for closings that took place this year, compared to less than 10 months for closings in 2006.

Fund managers have also been lowering their sights in the past few quarters. According to Preqin, hedaquartered locally at 230 Park Ave., in Q2 2009 there were 390 funds with an aggregate fundraising target of $227 billion. A year later, the number of funds had fallen slightly to 378, while the aggregate target had slipped 41% to $134 billion, due partly to lower transaction volume making it less necessary to raise more.

Preqin says concerns about the market, rather than any lack of capital to invest, are driving investors’ reluctance to commit capital. “Even if many have resolved their liquidity issues, largely owing to the rebound in the stock markets, real estate portfolio values have failed to show the same levels of improvement, leaving many institutions focusing on asset classes that are generating stronger returns,” the report states.

Although Preqin’s report says “the age of multi-billion-dollar global funds may be coming to an end,” it notes that firms targeting opportunistic or value-added returns could represent a better bet for investors. Moreover, Prequin says 20% of funds have beaten their targets thus far this year, compared to just 6% during ’09. The most dramatic example is provided by Los Angeles-based Mesa West Capital, which closed its Mesa West Real Estate Income Fund II in July with nearly $615 million in commitments, well above its $400-million target.