Capital-raising trends in the private equity industry continue to show that the industry believes commercial real estate remains an attractive investment option, even in a more uncertain economic environment. There has been both more money being raised for real estate investment and a rising number of funds in the market looking for investment capital in recent months, according to the second quarter report on private equity real estate fundraising activity by London-based research firm Preqin. However, these fundraising efforts have not remained immune from some challenges, including the longer timeframes it takes funds to reach a final close and fewer funds that raise sums that are above their original targets. Here are some takeaways from Preqin’s report.
- Helped in large part by the mega-fund Blackstone Real Estate Partners X (BREP X), private equity real estate fundraising rose past its five-year quarterly average by almost 24% in the second quarter of 2023, to $57 billion. Closed in April, BREP X raised $30.4 billion and became the largest real estate or private equity drawdown fund ever.
- There were significantly more funds in the market raising money during the period than at the beginning of the year, at 2,183 as of June vs. 1,779 in January. On the flip side, the greater competition for investor capital, coupled with a less favorable environment for commercial real estate, has meant that more funds had trouble reaching their close in the second quarter. Preqin reported that 82 funds reached their final close during the period, down from 105 in the first quarter.
- Preqin’s analysis of how long it has historically taken closed-end funds to reach their capital-raising targets found that 2023 marked the first time it took more than 35% of funds two years to close. In addition, only 22% of funds managed to close above their fund-raising targets in the first half of this year vs. roughly 35% that tended to exceed their targets over the past five years.
- Funds focused on North American real estate accounted for 80% of the money raised during the second quarter, or $46 billion. The overall figure was more than four times higher than money raised by North America-focused funds during the first quarter.
- A survey conducted by Preqin on investor outlooks on alternative assets in the first half of this year discovered that investors exhibited a rising level of interest in value-add real estate opportunities, with 56% indicating they would pursue that strategy in the next 12 months, up from 44% who planned to do so a year ago. During the same period, the share of investors interested in core and core-plus strategies fell by 7 percentage points in both cases, to 48% and 40% respectively. Percentage of investors interested in debt, opportunistic and distressed strategies stayed roughly the same.
- That change in sentiment is already being reflected in the fundraising numbers—closed-end funds pursuing value-add strategies held $120 billion in dry powder in June 2023, more than funds pursuing any other strategies. Only funds with an opportunistic strategy came close, with $116 billion in dry powder.