The Rise of Separate Accounts

NEW YORK CITY—Separate account mandates, which hit something of a plateau between 2006 and 2012, are becoming more of a force to reckon with as both investors and managers discover their attributes. Preqin said Wednesday that private real separate accounts hit a new high for raising capital in 2014, and have already comprised more than a quarter of the funds closed as of mid-May this year.

““The growth in separate account use represents a change in the way investors access the real estate asset class,” says Andrew Moylan, head of real assets products with Preqin. “Larger investors are utilizing their size to put large amounts of capital to work, gain greater control of investment decisions and negotiate better terms. Separate account structures are likely to continue to grow in prominence with rising investor appetite and fund managers offering more separate accounts to investors.”

Over a seven-year period spanning the prior market peak and the global financial crisis, separate accounts accounted for 8% of the total number of private equity real estate funds and just 7% of the total capital raised, Preqin says. Since 2013, that average has reached 22% of the number and 15% of the aggregate capital, while more capital--$17.8 billion—was raised through separate accounts in '14 than in the eight prior years combined. “Even with only 13 separate account mandates awarded so far this year, this still represents over a quarter of all vehicles closed in 2015, indicative of the growing prominence of separate accounts in the industry,” according to Preqin's Oliver Senchal.

Headquartered in New York City and London, Preqin says that such fund structures offer many advantages over more traditional pooled fund investments for both investors and fund managers alike. From an investor's perspective, “they provide greater control over their real estate exposure, more favorable fees and fund terms, and exposure to more desirable assets.” For managers, they provide “the opportunity to build stronger relationships with investors, and gain large commitments from some of the world's most prominent investors.”

By strategy, vehicles targeting core real estate secured the highest proportion of mandates (40%) and the highest proportion of separate account capital (39%) in the from '12 to the present. “It is perhaps unsurprising that core accounts have gained the most traction; the approach can offer a good option for investors to place large amounts of capital in stable, income-producing assets,” Senchal writes. He adds, however, that higher risk strategies are also widely utilized, with the amount of capital allocated to value added and opportunistic accounts combined ($17.1 billion) equaling that of core accounts over the past three-and-a-half years.

Over the same time period, half of all separate accounts have been primarily US-focused, followed by Europe with 30% and the Asia-Pacific region with 13%, according to Preqin. The proportions of total capital raised follows a similar trend, with US-, Europe- and Asia-Pacific-focused accounts collecting 43%, 34% and 19% of the total capital respectively.

By property type, the primary focal points of separate accounts by mandate have been diversified (30%), residential (23%), office (17%) and industrial (16%). However, Preqin reports that industrial-focused separate accounts have accumulated the largest proportion (36%) of aggregate capital since 2012, more than that of office- and residential-focused mandates combined.

Notable real estate separate accounts awarded over the past year include the $2-billion Goodman North American Partnership with the Goodman Group and the Canada Pension Plan Investment Board, and the $750-million Aevitas Property Partners fund with the Washington State Investment Board. “As separate accounts become more widespread, they will constitute growing proportions of many investors' overall real estate portfolios,” Motlan says. However, given the additional resources required to manage, separate accounts are likely to remain the preserve of the largest and most sophisticated investors in the asset class.”