Private Equity Fundraising Plunges As Investor Appetite Shifts to Less Risk
Money Flows to Income Properties, Largest Fund Managers, Analysis Shows
Commercial real estate fundraising among private equity firms plummeted for the three months ended last week, with the number of funds completing their capital collection dropping to the lowest in more than a decade.
The data is a signal, not necessarily negative, that the long-running rise in prices and dwindling supply of good deals has investors shifting their appetites to tried-and-true income properties and funds run by large managers such as Blackstone Group.
Forty-seven funds reached their final close in the second quarter, raising just $29 billion. That marks a sharp decrease from the $46 billion secured in the first quarter, according to private equity data provider Preqin.
The quarter was also short of the equivalent period last year, which saw 115 funds raise a combined $38 billion.
The swing in fortune comes amid record high amounts of dry powder built up from six straight years of private equity fundraising of more than $100 billion each year. At year-end 2018, $295 billion of commercial real estate investment was waiting to be deployed, according to Morgan Stanley Research.
As property prices have appreciated over those past six years, it has become harder and harder to spend that money on one-off property transactions.
"The real estate industry has long been something of a bellwether for private capital over recent years, with concerns over pricing pressure and future returns emerging here first before becoming widespread in private equity or infrastructure," Preqin noted in reporting second-quarter numbers. "The collapse in fund closures may strike a warning note for other asset classes in that regard, but it is worth noting that the real estate industry is operating under unique conditions."
The quarter-to-quarter swing doesn’t imply a down trend going forward. The amount raised in the second quarter still puts 2019 on track for raising more than $100 billion.
"There is more involvement from public, listed and corporate investors, and the industry depends on under-siege sectors like retail and office real estate for deal opportunities," Preqin said.
The firm said real estate industry fundamentals remain strong and forecast a rebound in the coming months.
More of the money coming in is being targeted toward incoming-producing core assets, a trend that also bodes well for that part of the market even if it seems likely to intensify pricing pressure.
The appetite for core private real estate funds has increased over the past year, with 63% of investors planning to commit to these funds in the next 12 months, up from 49% a year ago, according to Preqin.
Investors are generally looking to put less money toward fewer funds than they were a year ago.
As evidence of the accelerating concentration of capital among the largest fund managers with successful records of accomplishment, Blackstone runs the three largest funds currently in market, Preqin said. In fact, just 5% of funds are targeting $1 billion or more, but these account for 33%, or $84 billion, of all the capital being sought from investors.