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Capital Flows to Private Equity Real Estate Funds Remain Lackluster

Fund managers are having a tougher time reaching fundraising targets, requiring them to stay in the market longer than intended.

Investor capital is moving off the sidelines and back into private equity real estate funds, but the rebound is not as big as many had hoped.

According to Preqin, the aggregate capital raised for 2020 dropped 22.5 percent to $141 billion. That decline is not surprising given the events of the pandemic. Although fundraising improved in first quarter, capital flows remain subpar compared to pre-pandemic levels. The $33.74 billion in aggregate capital raised for private equity real estate funds in first quarter is down 11.8 percent year-over-year and 36.2 percent below the $52.9 billion raised in first quarter 2019.

“We haven’t necessarily seen clients increasing allocations to real estate, but they are maintaining allocations,” notes Marc Cardillo, CFA, managing director, Real Assets Research at Cambridge Associates in Boston. The firm serves a global client base that includes endowments, family offices and pension funds with $44.5 billion in AUM and $500 billion in assets under advisement (AUA). Limitations on travel continue to make it difficult to tour properties and meet with managers in person. In some sectors, transaction volume is still down, meaning that investors are likely getting less capital back and have less to redeploy. However, Cardillo does expect 2021 numbers to rebound as vaccinations increase, economic uncertainty diminishes and travel resumes.

“We believe that fundraising momentum is increasing as 2021 progresses,” agrees William Lindsay, a partner at PCCP LLC, a private equity real estate investment firm.  “The pandemic slowed down commitments for several months, but with apartments and industrial real estate outperforming expectations post-pandemic, we expect to see investors putting their new allocations to work in 2021,” he says. PCCP currently has $12.8 billion in AUM and provides real estate debt and equity to value add real estate through closed-end funds, joint ventures and separate accounts.  

One hurdle during COVID-19 was that many investor groups had rules that prohibited a commitment to a manager unless the investor team had physically visited the manager’s offices. By the third quarter of 2020, investors had modified their procedures so that they could conduct diligence virtually and make new investment commitments. “Investors have refined their virtual diligence process and are making commitments, and we’ve never been busier,” adds Lindsay.

Fundraising success remains mixed

Data shows that fund managers are having a tougher time reaching fundraising targets. During first quarter, 39 percent of the funds that closed had been in the market for more than 24 months compared to 28 percent of funds that closed in 2020, according to Preqin. However, the view from individual fund managers is more of a mixed bag depending on the fund strategy and track record of the fund and management team.

For example, Parkview Financial posted a record year of fundraising in 2020 for its open-ended private real estate debt fund. Since launching the fund in 2015, Parkview has executed $2 billion in financing for multifamily, retail, office, industrial and mixed-use projects with executed loans ranging from $5 million to $200 million.   

“In March of 2020, everything dried up. No one wanted to give us any money,” says Paul Rahimian, chief executive officer of Parkview Financial. That pause in fundraising lasted about 60 days and then slowly money began returning. Although the firm does not publicly disclose its AUM numbers, the firm’s annualized AUM grew by 41 percent in 2020 with an additional 52 percent growth projected for 2021 based on its first quarter fundraising.


Parkview Financial typically raises capital from a number of repeat investors who allocate money to the fund on a quarterly or even monthly basis. The minimum initial investment amount is $250,000, and that investor base includes institutions, family offices, HNWIs and feeder funds, as well as RIA channels. Some of those investors have returned and others have not. “What that tells me is that it might not necessarily be the fund that is determining the allocation as much as the investor,” notes Rahimian. Some investors are still concerned about COVID-19 and that’s changing the way they invest in alternatives, while others have gotten comfortable and have jumped back in with new allocations. “I think it is really a tale of different investors that is driving that difference,” he says.

Rahimian also attributes the recent fundraising success to the fund’s tenure along with a steady performance during the pandemic that included no distressed loans. About 95 percent of the fund is invested in multifamily construction loans with no exposure to hospitality and a small amount of retail. “I think investor appetite for multifamily real estate actually went up during COVID, because even though multifamily took a hit like everything else, it took a very small hit and has bounced back fairly quickly,” he says.

Investors continue to chase yield

Despite the disruption caused by the pandemic, investors remain hungry for yield. “Investors are under tremendous pressure to replicate very strong  real estate returns experienced over the past 7 or 8 years. So we are seeing increased interest in higher-yielding strategies,” notes Lindsay. That being said, investors are continuing to build out portfolios with a combination of less-volatile credit, core and core-plus strategies and higher yielding strategies, he says.

According to Preqin, debt funds raised the most capital during first quarter at $6.2 billion, followed by $5.8 billion for value-add and $4.1 billion for opportunistic. One example of the appetite for high-yielding opportunistic funds is Ares Management Corp. The firm announced last month that it had successfully closed on its third opportunistic fund with $1.7 billion in commitments, exceeding its $1.5 billion capital raise target. Ares U.S. Real Estate Opportunity Fund III, L.P. will target distressed assets, as well as repositioning and select development opportunities.

At a late point in the cycle, advisors would typically counsel clients to shift investment to lower risk strategies, such as core and core plus, and move out of opportunistic. Yet what had felt like a mature stage of the cycle prior to the pandemic seems to have reset to recovery. As such, some advisors are recommending that clients shift back into higher risk, higher reward strategies – namely opportunistic and value-add funds being the best sectors to benefit from the recovery or capitalize on distress.

Investors also are exhibiting more interest in alternative property types. Investors have a lot of exposure to the main property types – office, industrial, apartment and retail – and there is now more enthusiasm for alternatives such as seniors housing, student housing, single family rentals, data centers and self-storage. “I think managers that are focused in those areas are probably having a much easier time than groups that are focused on more of those traditional property types,” says Cardillo.

One strategy that fund managers are using is fee discounts for investors who can commit to a first close or early close. “Those fee discounts can be meaningful and can help drive fundraising for those earlier closes,” notes Cardillo. “So, we probably are seeing more GPs being creative to offer incentives to get groups to make a commitment.”

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