Success Breeds Success in PE Fundraising

NEW YORK CITY—Experience gets you far in private equity fundraising. Preqin said Wednesday that a handful of the most experienced PE real estate managers have raised the most capital in the past five years, and also have had the best track record for meeting or exceeding their fundraising goals.

The private equity research firm, based in New York City and London, reports that the 20 most successful managers globally may represent only 1% of the total number of active firms, but account for $69 billion of the $215 billion in available dry powder, or 32% of the total. The top three managers—the Blackstone Group, Lone Star Funds and Brookfield Asset Management—account for a total of $73 billion of the private capital raised in the commercial real estate space since 2009, a greater amount than the next 17 in the top 20.

Along similar lines, managers that have raised more than five funds previously account for a growing proportion of aggregate capital raised, “accounting for 53% of total capital raised in 2013 compared to 33% in '09,” according to Preqin's report. They've also done better when it's their turn at bat: 92% of the funds raised by the top 20 managers met or surpassed their goals last year, compared to 67% of the funds raised by all others.

Increasingly, Preqin says, there's a division between funds with more and less experience. Just 17% of institutional investors will invest in first-time funds today, down sharply from 45% in December '09.

“With institutional investors increasingly drawn to more experienced real estate fund managers, and particularly those that can demonstrate strong performance in challenging markets, capital is becoming more concentrated among firms that have significant experience managing private real estate funds,” says Andrew Moylan, head of real assets products at Preqin. “This increasingly bifurcated market has seen a small number of large players account for a sizeable proportion of the capital available for private real estate investment.”

Success begets success, it appears. “A key reason that many of these firms have been so successful in securing investor capital is a proven track record of strong performance, which is a crucial factor in manager selection for many investors,” according to Preqin. “Fifty-seven percent of funds managed by these firms are ranked as top or second quartile, while only 20% are ranked as bottom quartile.”  One conclusion to be drawn: in many cases, it has been a strong performance track record that has enabled these firms to be successful in raising capital during the very tough fundraising market of recent years.”

Long term, the market may see even greater division between more and less experienced managers. “Appetite for first-time fund managers has steadily declined in recent years as investors increasingly look for managers with a proven track record of private real estate investment,” according to Preqin. Adds Moylan, “Although this outlook is inevitably challenging for less experienced managers, many first- and second-time firms have been able to successfully raise capital, but they need to be able to offer a unique and compelling investment opportunity and demonstrate a strong and stable team in order to be successful in the current market.”