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Previously in this space (“Capital Surge” and “Capital Surge: Part 2“) we’ve discussed a couple of interesting conclusions from the Cornell University’s Baker Program in Real Estate & Hodes Weill study the “2013 Institutional Real Estate Allocations Monitor” in relation to more recent news.

A third key take-away from the survey that caught our attention is the shift towards an increasingly global, cross-border investment strategy for many institutional investors. One of the more revealing stats is that Asia-Pacific investors are currently under-invested by 130 bps and also plan to raise their targets by 140-150 bps (i.e., almost 300 bps of their portfolio’s total size will be newly invested in real estate in the near-term).  So, don’t be surprised as this set of investors ramps up their investment quite rapidly.

In addition, despite being not as under-allocated, 38% of North American investors (compared to 24% of investors from Asia-Pacific) revealed their intent to increase their investment into private real estate during 2014, according to data-provider Preqin.  So whether capital placement is driven by need or want the conclusion remains that capital placement certainly will be on the rise, and not only in investors’ back yards.  For instance, of the North American investors seeking investments in the next 12 months, 38% are targeting Europe, which is up from 17% a half-year ago. 60% of Asia-Pacific investors are aiming at Europe, versus 39% a half-year ago.  Those are impressive jumps.

Furthermore, CBRE released a report earlier this week regarding Middle East capital flows into real estate (“In and Out – Middle East”). This research report anticipates a substantial amount of capital flowing from that region over the next decade.  CBRE estimates $180 billion will be invested by Sovereign Wealth Funds (SWFs) and private investors from the Middle East in Europe (80%), the Americas (10%) and Asia-Pacific (10%). The domestic markets don’t have nearly enough volume to absorb the SWF’s investment targets, hence the capital predominantly goes internationally. By comparing this amount to the $45 billion invested between 2007 and 2013 we can begin to understand how significant an increase it is.

Therefore, in order for these investors who are escalating their investment volumes internationally to invest further and further from their front door, it requires technology to bridge that geographic gap.  Evolving technology will allow institutional investors to use their resources effectively from a central base – for both identifying & sourcing investment opportunities as well as organizing multiple due diligence processes efficiently.   Moreover, investment managers can benefit from the same technology by being able to extend their marketing reach to capital partners further afield.

This is the Sterlinks blog. Access Sterlinks tools to maximize your internal resources by visiting http://www.sterlinks.net.

As mentioned earlier in our “Capital Surge” post from a few days ago, the “2013 Institutional Real Estate Allocations Monitor” from Cornell University & Hodes Weill identified some interesting trends in the industry.  We’d like to expand upon another noteworthy takeaway from that study today, including a bit more recent info:

“Institutions continue to shift from direct investing to outsourcing to third-party managers.”

It’s been explained that the flow of capital into real estate will be steady in the coming years. A particularly active set of investors will be small to medium-sized institutional investors (i.e., under $50 billion in global AUM).  One of the likeliest vehicles for smaller players to place capital would be through private funds.  In fact, 66% of investors with under $50 billion in AUM will invest via private funds.

In contrast, investors with over $50 billion in AUM (just 47% in funds) tend to prefer JVs, separate accounts, or going direct.  For example, large insurance companies tend to focus on larger, lower-yielding core deals and have bigger staffs who can more readily manage their investments without 3rd parties.

Meanwhile, the private real estate funds will see a rise in interest coming from these several investors looking to increase their under-target allocations.  As such, investors will soon be competing to place their capital into the best funds and, in turn, investment managers will be fielding more investor requests (e.g., Due Diligence Questionnaires).

Case in point: data-provider Preqin has some revealing stats in its Q1 2014 Quarterly Update that shows 54% of private funds that closed in Q1 2014 either met or exceeded their capital targets.  Furthermore, their May Real Estate Update reveals that funds focused on Europe – one of the most attractive investment regions currently – have met or exceeded their capital raising goals in 72% of the funds that closed in Q1 2014.  While this is up from 2013 and 2012 (57% and 46%, respectively), what is most remarkable is that 29% of the European focused funds exceeded their fund raising goals by more than 25%.  An additional tidbit is that in the past year the average time these funds are marketing has dropped to 17 months from 19 months.

A corollary to this is that mediocre managers may take advantage of the large amount of capital eagerly seeking a home. Investors will need to maintain their rigorous investment review processes in order to place capital in those “best in class” funds. As capital surges into real estate it will likely become increasingly competitive for all.  Parties who are able to use technology to be efficient and maximize their resources during this screening and selection process will have a leg up on their peers.

Check back with us soon as we delve into one of the report’s other key conclusions.

This is the Sterlinks blog. Access Sterlinks tools to maximize your due diligence resources by visiting http://www.sterlinks.net.

The flow of capital into real estate has been picking up momentum, driven by a variety of sources.  At the beginning of the year, Cornell’s Baker Program in Real Estate and Hodes Weill released the results of a study they had conducted entitled the “2013 Institutional Real Estate Allocations Monitor.” Its focus is on the trends of allocation of capital into real estate. Combining the conclusions of that report with updated data from the first two quarters of 2014, we highlight some noteworthy trends in capital flow.

Let’s examine a couple of the study’s key conclusions in today’s context:

  1. Institutions are significantly under-invested in real estate, which is resulting in greater capital flows into the sector.
  2. Institutional allocations to real estate are increasing, indicating that the pace of annual investments will likely continue to accelerate well beyond 2014.

It has been well publicized that capital is currently flowing into real estate as the global financial crisis begins to be talked about more and more in the past tense. It is welcome news that capital will continue to flow into the sector for the coming years. This is being driven largely by two components: (1) being short of current target allocations and (2) the aim to raise those allocation targets further.

The report mentions that nearly 40% of institutions are below their portfolio allocation targets for real estate by more than 100 bps. (Industry estimates of institutional AUM are $60 – $80 trillion.) In fact, we can add more fuel to the fire by comparing the distribution of real estate investors’ current target portfolio allocations to the distribution of their actual allocations in Q1 2014. No surprise on the punch line: allocations are still below targets. Moreover, investors are expected to increase their targets by over 50 bps on average.

One sub-set of investors to note is the institutions with less than $50 billion in AUM, whose current under-allocations are 104 bps on average. Investors with $5-$10 billion in AUM (100 bps below target) and those with less than $1 billion (-125 bps) are the most under-allocated within that group. Therefore, while the report indicates capital’s continued and accelerated flow into real estate, it can be expected that there will be various sources of this capital (as opposed to just a few mega-investors topping up their allocations).

Technology now available will aid these investors in their efforts to boost their real estate investments while allowing them to be thoughtful, conduct thorough due diligence, and manage risk.

Check back with us soon as we delve into some of the report’s other conclusions that we found worthy of discussion at this point.

This is the Sterlinks blog. Access Sterlinks tools to maximize your internal resources by visiting http://www.sterlinks.net.

A quick note on how successful fund managers differentiate themselves to investors: information.

Investors seek clear, detailed information on fund managers from the very beginning of a prospective relationship. In fact, a lack of clarity in fund information early in the process is a red flag regardless of a manager’s history. Investors know you’re a potential partner when they are able to review details on fund strategy, track record, team and terms easily.

Make it easy by adhering to standardized methods in communicating fund information.

For real estate managers, INREV provides detailed guidance on presenting your track record.

For private equity funds, AltExchange has done a remarkable job of boiling down key metrics.

Use these templates to signal your ability to be a true partner to your investor.

Finally, take a look at the graphic by data provider Preqin: active investors appreciate proactive managers.

fundraising private equity real estate

Investors describe their preference for originating investments to Preqin.

Employing current technology to better communicate and organize yourself during the fundraising process will be appreciated by potential investors. Making a strong impression matters, and technology can make that simple to do.

This is the Sterlinks blog. Access Sterlinks tools to maximize your internal resources by visiting http://www.sterlinks.net.

 

Raising a fund for small- to mid-size investment managers requires a lot of effort and resources across the organization. The right technology resources can be an instant boon to investment managers raising capital. Tools for managing the due diligence process efficiently while accessing a broader pool of capital enables top-quality investment managers to be responsive, transparent, and quick. These effects will be well-regarded by institutional investors who have rigorous standards in placing capital.

Last week Blackstone announced the closing of their record-setting European real estate fund at €5.1 billion. In fact, investors have shown a sizable appetite for large global funds who are focusing on real estate opportunities, especially in Europe. For instance, the following well-known global giants closed international real estate funds in 2013 Lone Star ($12 bn in 2 funds), Blackstone ($3.5 bn for debt), Brookfield ($4.4 bn), Starwood ($4.2 bn), and Cerberus ($1.4 bn).

Moreover, Perella Weinberg (€1.3 bn) and Orion (€1.3 bn) raised European-specific opportunistic funds in 2013. Plus, Tristan recently left hundreds of millions of Euros unfulfilled from investors when they hit their hard cap of €950 million in capital commitments for their EPISO 3 Fund last month. However, these examples actually reveal some subtle issues with the capital formation process itself.

First, not every European investment manager is able to capitalize on this halo effect of a “hot Europe” and absorb the institutional capital seeking a home. In fact, funds operating several degrees of magnitude lower than Blackstone, Lonestar and even Tristan are still seeing long lead-times for raising their funds. Preqin details that funds that closed in 2013 took an average of 19 months to close (and we would guess that the bigger ones listed above took far less than 19 months and therefore skew the average lower than, say, what the median might be). On top of that, over 40% of the funds currently in the market have been raising (or trying to raise) capital for 18 months.

Yes, the big funds are big for a reason – their scale has been achieved through capitalizing on consistent quality performance. Another stat for you: 7% of 2013 capital raised was done by 1st time funds while 44% was raised by managers with a 9+ fund track record. So on the surface, the big funds seem like safe bets. But how much of that “safe” bet is due to “brand?” There are many funds in the 250 – 400 million equity range that have delivered just as strong (if not stronger, in some cases) returns for their investors. So then why are the big names finding demand so buoyant, while the more niche players take much longer to close capital than ever before?

The transparency required and the due diligence conducted during the capital formation process is now getting harder to manage. For example, if any smaller European fund manager were able to allocate fewer resources towards capital raising and conduct due diligence with more organization and more efficient communication, then they would certainly be able to react to the recently increased scrutiny from institutional investors. While investors are eager to take advantage of “recovery” in the real estate markets and allocating sizable investments to take advantage of that, it is more likely that they allocate this capital in larger chunks with the big name funds instead of spreading it around to several smaller fund managers.

This is the Sterlinks blog. Access Sterlinks tools to take your relationships with investors and investment advisors to another level. Visit http://www.sterlinks.net.

Identifying the right capital partners takes time and resources. Current trends exacerbate the expense of seeking partners in the institutional investor universe.  Allocating investment team resources to investor communication and marketing tasks can place a cumbersome burden on managers. 

Marketing is a critical function, and yet managers often lack sufficient dedicated marketing resources. Even when a marketing team is in place, they are often stretched thin with processing and administration (think excel-based tracking of investor relationships and manual inputs). As a result, investment teams otherwise meant to focus on transaction pipeline, investment execution and value-add asset management are diverted to marketing and report generation.

Marketing professionals should be focusing on building relationships and interacting with investors, not excessive paperwork, report generation or desktop publishing.

This is the Sterlinks blog. Access Sterlinks tools to take your relationships with investors and investment advisors to another level. Visit http://www.sterlinks.net

Investment managers recognize that they are contending for capital in a highly competitive, crowded environment.  The capital sought by managers for closed-end fund strategies alone is growing on a quarterly basis.  However, for any given capital raise the average number of months a manager now spends on the road has doubled since 2007 – to approximately 18 months in 2013. 

Savvy investment managers realize that their success hinges on striking a balance between the business of investing and the business of capital raising.  Managers must deftly navigate a detailed investor due diligence process and convey high standards of transparency, yet at the same time commit to delivering a strong investment track record.

This is the Sterlinks blog. Access Sterlinks tools for your capital formation process by visiting http://www.sterlinks.net.

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