Private Equity's Dry Powder Approaches $100B

NEW YORK CITY-Although dominated by 800-lb. gorillas such as the Blackstone Group, private equity's participation in commercial real estate doesn't end with them. As of August, US-focused private real estate fund managers have an aggregate $98 billion in equity available for investments in new opportunities, compared to $79 billion this past December.

So says Preqin in a new report, which also shows that the funds spent almost as much in 2012 ($67 billion in equity) as they did at the market's peak in 2007 ($68 billion that year). Further, private equity's CRE assets under management reached an all-time high of $335 billion as of this past December.

In large measure, this expansion is due to the greatly improved outlook for fundraising. Whereas 84 US-focused funds raised an aggregate $25 billion in 2010, that rose to an aggregate $40 billion by 111 funds last year.

Although 2013 year to date has seen only 64 US-focused funds reach a final close, “the aggregate capital raised by these funds is $33 billion, representing 83% of the capital raised in the whole of 2012,” according to Preqin. During the same time frame in '12, 66 funds closed with just $17 billion among them.

This ramping-up of fundraising represents “encouraging news for the private real estate industry in the US” and indicates “improving confidence in the country from institutional investors,” the Preqin report states. However, current fundraising levels are still “well below” the heights reached in 2008, when 146 US-focused private real estate funds closed, raising an aggregate of $71 billion.

The growth of the private equity industry has also resulted in “a rise in the number of fund managers actively investing in the US,” with the result being “an increasingly crowded and competitive fundraising market,” according to Preqin. “The level of experience among these managers varies considerably, and the top-heavy nature of the industry is evident in the fact that only a small number of fund managers are able to raise very large amounts of investor capital.”

Given Blackstone's dominance in the sector, it's not surprising that the largest US-focused fund to close between '12 and August of this year was Blackstone Real Estate Partners VII, which raised $13.3 billion, a new record. Preqin says the 10 largest funds to close in this time period raised a total of $38 billion, which represented 52% of the total. “This further illustrates the importance of a handful of key players to the private real estate industry.”

Another lesson to be taken from the sector's recent performance is the greater prominence of debt as a strategy. Three of the 10 largest funds that have closed since '12 have included debt as a strategy, with Blackstone Real Estate Debt Strategies II solely focusing on debt, and closing on $3.5 billion, the report states.

“Encouragingly, North America is viewed by a large proportion of investors as presenting the best private real estate investment opportunity in the current market, and over half of surveyed US-based investors believe that their investments in the asset class have met expectations,” according to Preqin's report. However, the research firm says, “investor sentiment among North America-based institutions reveals that only just over a third are seeking to make new commitments in the coming year.”