Private Equity Takes Opportunistic Tack

NEW YORK CITY—Risk has its rewards, certainly in the minds of investors. Even as the Wall Street Journal reported Thursday that buyer inflows into higher-yield debt reached $3.42 billion in the first quarter, nearly double the year-ago tally, Preqin issued research showing that 59% of global real estate investors searching for new private equity funds plan to target opportunistic funds.

That's up sharply from 47% who sought such funds a year ago. It occurs as closed-end private real estate fund managers have hit an all-time high of capital available to make new investments in North America, whether lower-risk core or higher-risk opportunistic.

Investors' preference for core funds has waned, though, according to Preqin. Just 35% of investors will seek out new core funds over the next 12 months, compared to 56% in Q1 2013.

This forward-looking comparison dovetails with opportunistic funds' track record of late. Sixty-four percent of such funds that closed last year met or exceeded their fundraising targets, compared with 42% of funds that closed in 2012.

These funds also spent less time on the road last year than other types of funds, reversing a trend that prevailed until two years ago. By comparison, 11 core funds that closed in '13 raised an aggregate of $2.3 billion, less than one-third of the 35 funds that closed in '12 and raised a total of $6.5 billion.

At present there are 142 primarily opportunistic real estate funds on the road, targeting aggregate capital commitments of $49 billion. That's up from 117 such funds in market at the same time last year that sought a combined $47 billion.

The 800-lb. gorilla of private equity real estate, the Blackstone Group, this week closed one of the largest opportunistic funds on record, Blackstone Real Estate Partners Europe IV, at just under $7 billion. It also has the largest opportunistic closed-end private real estate fund now in the market, Blackstone Real Estate Partners Asia, which is targeting $4 billion.

“Experienced managers, such as Blackstone Group, account for a large proportion of firms raising opportunistic funds, with 31% of primarily opportunistic funds in market accounted for by managers which have raised five or more private real estate funds previously, representing 55% of capital sought,” according to a Preqin report issued Thursday. “However, there are also a large number of first-time managers looking to attract investor capital for opportunistic real estate, with 33% of opportunistic funds in market being raised by first-time managers, although these funds account for only 13% of capital sought due to emerging managers often setting lower fundraising targets.”

The influx of first-timers with lower fundraising goals helps explain why the 142 funds currently on the market are targeting just $2 billion more than the 117 that went on the road the year prior.

Earlier this week, Preqin reported that private equity funds had a record-setting $110 billion of capital available to invest in North America. The largest proportion of the 272 North America-focused private real estate funds currently on the road are following value-added and opportunistic strategies, Preqin says. There are 117 value added funds targeting $35 billion in capital commitments and 75 opportunistic funds targeting an aggregate $23 billion.

“While there was a decline in fundraising for North America-focused funds in Q1 2014, compared with the last quarter of '13, there have now been several consecutive quarters of strong fundraising, reflecting the growing institutional investor appetite for real estate funds,” says Andrew Moylan, head of real assets products at Preqin, which has offices in New York City, London, Singapore and San Francisco. With fund managers boasting $110 billion worth of dry powder “and with confidence in US real estate markets continuing to improve, these firms are likely to be very active in the coming months.”