September 12, 2024
Charles Allen, Head of European Real Estate, speaks to Guy-Montague Jones from Green Street News about the evolving tactics required for fundraising in the current market.
Fund managers are grappling with what is now a sustained fundraising drought. The total amount of equity raised last year was the lowest since 2014, according to Preqin, and this year is shaping up to be little better.
The reality of fundraising in today’s market is perhaps even harder than this would suggest because of how the make-up of the industry has changed. The biggest fund managers are taking a bigger chunk of the pie – Blackstone alone accounted for more than a fifth of last year’s total equity raised – leaving the rest to be shared across a larger number of managers.
James Jacobs, global head of real estate in Lazard’s private capital advisory team, says: “Private equity real estate fundraising levels in general are similar to the early 2010s, which were very tough years, but there are now many more managers so it’s more competitive. The market, from a fundraising perspective, is more competitive than ever.”
Knocking on doors
So what can managers do about it? Fund managers that have successfully raised money emphasise the importance of knocking on as many new doors as possible.
Keith Breslauer, managing director and senior partner at Patron Capital, which raised more than €860m for its seventh flagship fund earlier this year, says that during its fundraising the firm “hit a wall” in the US, where a lot of investors had reduced appetite for real estate and wanted to focus on the domestic market in the belief that it offered more compelling recovery plays.
“We pivoted and said ‘where else in the world are we going to find capital?’” Breslauer says. “We went everywhere. The key was setting up a lot of meetings.
“We sent out 9,154 emails – around 8,000 of them to new investors. That resulted in 580 meetings – 167 in person and 413 on video conferencing.”
Apart from rattling the can harder than ever, another tactic managers are employing is creating a sense of urgency with investors. It is all too easy for investors to sit on the sidelines, but if they feel they could end up missing out, that will help move things along.
Jonathan Reid, a managing director at Hodes Weill & Associates, says: “You have to have a real reason for investors to commit. Executable deals and demonstrable pipeline are both very important at the moment.”
However, there are risks for managers. If they put properties under offer, but fail to convince investors to commit, they may be forced to pull out. If a manager gets a reputation for this, it can be damaging and make it harder to secure deals.
Beyond the fund
What can help is being nimble. There are different options open to managers when they are trying to raise capital for a fund and push on with deal-making.
Reid says: “At this stage of the cycle, you have to be quite flexible. That can mean transacting outside a fund before you have a first close or offering co-investments or one-off deals.”
This has become a common feature of the market. La Française, for example, told Green Street News earlier this year that it was delaying the launch of its European value-add fund and pursuing other approaches including mandates, joint ventures or club deals. Orion Capital Managers, meanwhile, is understood to be continuing to work towards a first close for its sixth fund later this year, but has also been funding deals outside the fund with individual investors.
Managers can also use their own balance sheet to get deals off the ground and help build momentum, although many have limited capacity.
For mid-market managers, persuading investors to come into a diversified fund is especially tough at present. Some are succeeding. Just this week, Green Street News revealed that Castleforge had received more than £400m in equity commitments for its fourth fund, exceeding its £300m target, ahead of a final close.
However, managers report that it is typically easier to raise for targeted strategies, typically in sectors with long-term tailwinds like residential and logistics.
Clearbell Capital senior partner Manish Chande says: “There is more investor interest in value-add and opportunistic strategies this year than last year but it is taking time to convert that into actual capital. Where those conversions will occur more readily is for very specific, targeted strategies.”
The squeezed middle
This reflects a trend that has been brought into focus by the difficult fundraising market. The rise and rise of the likes of Blackstone and Brookfield has created a top tier of multi-billion funds that are the first port of call for a lot of investors. Capital allocators see them as safe bets both because of their track records but also their sheer size, which means they are well diversified by property, even if they favour particular sectors. That leaves other smaller fund managers to work out how best to position themselves.
“A lot of investors are now using mega funds as a way to get baseline exposure to the asset class, and then they’re complementing that with country and/or sector-specific strategies that they believe will outperform,” says Jacobs.
“With that backdrop, you have a role if you’re a mega fund or a specialist, but it is the middle ground which is much more challenging. Mid-market generalist managers can still attract capital but their performance has to be really strong.”
Some managers have moved with the tide and built reputations as specialists in particular niches. Fiera Real Estate, for example, has developed more of a focus on industrial and residential in recent years.
Charles Allen, head of European real estate at Fiera, says: “These days you’ve either got to be really big or you’ve got to be a specialist. Most asset allocators will go for a big multi-billion fund, and then do a bit more of a rifle shot with a specialist manager, often in sectors that may be slightly more difficult to gain access to or that require operational expertise.”
The challenge for managers can come when their specialism falls out of favour.
It is possible to pivot. Meyer Bergman, for example, once known as a retail specialist successfully expanded into logistics, rebranding as Mark along the way. Thor Equities also moved in the same direction. And Long Harbour has diversified beyond ground rents, first into build-to-rent a decade ago and more recently into single-family housing and student accommodation.
However, developing new specialisms, even when moving into adjacent sectors, can be a costly endeavour, especially if a manager is diversifying from a sector that has become challenging. This can be seen with Long Harbour, which is grappling with the difficult ground lease market as it invests behind its other growing residential businesses. Accounts for the group filed on Companies House show that it made a small loss last year despite growing assets under management to £3.9bn.
Consolidation on the cards
The challenging market conditions could give rise to more M&A. However, at this stage in the cycle, sellers could be reluctant on pricing grounds. A more palatable alternative may be to sell a minority stake in the business to a party that is then able to provide capital to support future fundraising. Round Hill Capital, for example, sold a significant minority stake to CIM Group this summer, a year and a half after the company liquidated an entity employing most of its UK staff after running into financial difficulty.
The likelihood is that there will be more such deals in the coming months.
“I think there will be quite a bit of M&A and consolidation,” says Allen. “There will be some businesses that, if they’re unable to raise capital in the next 12 months, will be forced to look for a strategic partner to recapitalise them at a corporate level and provide some seed equity to go again. But achieving that is easier said than done.”
For the managers that are struggling to raise money, there is a lot at stake. It is not just a question of the impact on the bottom line. Key personnel are already more footloose than they were a couple of years ago because the downturn will have severely impacted their carry. If they then lose confidence in the ability of the fund manager to raise money, there is a high risk they will walk, further undermining efforts to raise cash.