Deep Pool of real estate private equity funds competing for capital
Bain Capital Real Estate grabbed the headlines by announcing that the company had closed a $ 3 billion private equity real estate fund, Bain Capital Real Estate Fund II. The recent close is further evidence of the strong rebound in real estate private equity fundraising, as well as the continued rise of mega-funds dominating the market.
According to Preqin, capital raising now exceeds 2020 levels, but still lags behind volumes seen in 2019. Fundraising from the start of the year until mid-October stood at 152.2 billion dollars, which is higher than the 146.4 billion dollars raised in 2020 and lower than the 186.1 dollars. billion dollars in annual increase for 2019. Preqin also noted that funds in the market are at record levels, both in number and in overall capital targeted. At the end of the third quarter, there were 1,284 funds targeting $ 365 billion in capital compared to the market’s 794 funds targeting $ 251.1 billion in capital at the start of the third quarter of 2019.
“The trend we’ve seen in the market and our platform is that this is a strong fundraising environment,” says Bernie McNamara, Global Head of Investment Solutions for CBRE Investment Management. “Part of this is a rebound in pent-up demand that was on hold or slowed down during the early days of COVID. Capital inflows began to re-accelerate in the fall of 2020. During the 12-month period from the third quarter of 2020 to the third quarter of 2021, CBRE Investment Management recorded record capital inflows to its platform with around $ 16 billion in capital raised across all real asset formats.
There are a number of factors that drive fundraising activity. Generally speaking, investors look for the characteristics that real estate typically offers, such as diversification, fixed income securities, lower volatility, and inflation hedging. For investors looking for higher returns, there are also selected distressed assets that create opportunities for good, targeted investment opportunities with enhanced returns, McNamara explains. “It’s not the whole market when it’s on sale due to COVID, but there have been selective opportunities, whether it’s providing liquidity through a recapitalization of a project or ‘a fund or equity where liquidity may have dried up for one reason or another, “he says.
GTIS Partners is also experiencing strong activity on its platform. “If we take a holistic look at new acquisitions, divestitures and capital raised, I think 2021 will be one of our busiest years of all time,” said Joshua Pristaw, Partner and Head of Capital Markets at GTIS Partners. Pristaw attributes a number of factors to investor inflows into private equity real estate funds. One is performance. Over the past 10 years, real estate has generally been a high performing asset class in the portfolio of institutional investors. Two is the denominator effect. Institutions tend to allocate a percentage of assets to alternatives. As the overall valuation of portfolios has increased, this frees up more capital to invest in real estate. Third, investors have a strong appetite for assets that generate returns and income in a low interest rate environment.
A fourth factor fueling the activity of the GTIS is the potential changes in tax legislation. Among its various funds, GTIS manages the GTIS Qualified Opportunity Zone Fund. “Anytime you have an environment where taxes go up or people talk about changing the tax code, like what’s envisioned in the Build Back Better bill, tax-advantaged products tend to increase in value and to be more interesting, ”says Pristaw.
GTIS announced in early December that its Qualified Opportunity Zone fund will close definitively on December 31. largest opportunity zone funds raised to date.
Another phenomenon is the growing interest of wealth management companies, as well as the increase in allocations to real estate among some institutional investors. Allocations from institutional portfolios to real assets are now increasing to 15%, 20% or more in some cases, McNamara notes. Canadian, Dutch and Australian pension plans are also among those groups that have traditionally given high allocations to real estate, and now more and more institutions are taking a similar approach.
These increasing allocations are likely to come at the expense of other fixed income investments. People are worried about the impact inflation could have on their fixed income assets, such as corporate bonds. “Many institutions are replacing part of their fixed income investments with real estate,” notes Pristaw.
The capital objectives of the funds increase
Bain Capital is the latest example of what has become a proliferation of billion dollar funds. In recent weeks, Harrison Street closed on a $ 2 billion fund and Kayne Anderson Real Estate also closed on a $ 2.75 billion fund.
According to an analysis by New York-based advisory services firm Alvarez & Marsal, the average private equity fund size was around $ 457 million in 2008. It fell dramatically after the Great Financial Crisis to reach a trough of $ 280 million in 2012. Over the past decade, the average fund size has jumped in the form of a “hockey stick” to reach around $ 800 million in 2021.
Another reason for the increase in fund size is the expansion of the asset class, notes Hameer Vaid, senior director of the private equity performance improvement group at Alvarez & Marsal.
Traditionally, private equity real estate funds have played in four or five major food groups: apartments, hotels, offices, retail and industrial. Increasingly, there has been an expansion into other types of goods such as logistics, data centers, doctor’s offices and others. “All of these accretive opportunities have played out over the past 10 years, which has focused on better returns and increased returns on an individual asset class basis versus an aggregate,” said Vaid. This has attracted more dry powder from investors looking to diversify their real estate investments across different types of properties, and this fundamental shift in weighting has contributed to more capital inflows and larger funds, he adds. .
In addition, the type of investment within funds has broadened. Over the past two to three years, there has been an increase in activity in mixed-use developments in all areas with components such as residences, offices, retail, parking lots and transportation. in common. “It requires multi-faceted and larger capital brackets, and we’re seeing an increase in average fund size as a result,” Vaid said.
At the same time, there has also been greater consolidation among managers over the past two years, notes Vaid. Niche players either had the opportunity to consolidate or took advantage of their own M&A strategy. Overall, this creates larger AUMs. So from a reporting standpoint, consolidation is another reason funds seem to be growing, he adds.
Groups invest across the risk-return spectrum
According to Preqin, the top three strategies attracting the most capital in 2021 are opportunistic with $ 115.6 billion in capital raised this year; value added with $ 97.2 billion and real estate debt at $ 60 billion. Yet different groups invest across the risk-return spectrum. “We see a continued increase in credit as a way to replace or supplement fixed income securities, and opportunities in the core and core lending space plus to generate much higher returns than traditional fixed income assets.” McNamara said.
For those primarily looking for income with modest capital appreciation in a core-type return execution, investors are drawn to “2.0 or 3.0” strategies, McNamara adds. For example, ODCE funds started entering a phase 2.0 several years ago, with some funds taking overweight strategies in sectors such as logistics and single-family home rentals versus office and retail allocations that have traditionally dominated basic strategies. Now 3.0 is moving more intentionally into other growth-oriented sectors such as life sciences, student housing, self-storage, cold storage and single-family rental properties, he says.
One of the trends to watch in 2022 and beyond will be the multiplier effect of public infrastructure spending and the Biden administration’s Build Back Better plan on private real estate investment opportunities. Investments in infrastructure could fuel more public-private partnerships and mixed-use development linked to new infrastructure projects, such as transit-oriented developments. In turn, these opportunities are likely to lead to more capital raising for private equity funds, as well as other private equity investment structures.
“I think the fundraising momentum is going to continue into 2022, and it comes down to performance,” says Pristaw. “What we are seeing is a significant volume of transactions. So, people sell things and return money to their investors, and they will keep reinvesting and allocating more money as long as their experience is positive. “