Small Private Real Estate Funds Squeezed Out by Larger Rivals

(March 7, 2014) — Private real estate firms raising their first or second funds are struggling to secure investor capital, research has revealed.

Data monitor Preqin found an aggregate $14 billion was raised by the 63 emerging private real estate funds that reached a final close in 2013. This was the lowest number to close in any year since 2003 when 52 such funds reached a final close.

The percentage of capital in this market that was allocated to emerging real estate managers fell to just 18% of the amount raised globally by funds closed in 2013. This was lower than the 21% it made in 2012 and 34% in 2011.

“Fundraising is always a particularly challenging prospect for newly established firms,” said Andrew Moylan, head of real assets products at Preqin, “and in a very crowded market with investors increasingly focusing on managers with a long track record, it is only becoming more difficult.”

Moylan said the majority of funds abandoned or placed on hold in 2013 were being marketed by emerging managers and these firms were increasingly losing out to their more established rivals.

The failure to secure capital is not due to a lack of effort, however. Preqin found emerging managers spent as much time on the road marketing their products as their larger peers, but were less successful.

Just 38% of superannuation schemes and 37% of insurance companies are open to investing with emerging managers, Preqin found.

For those willing to think outside the usual suspects, however, there may be rewards.

“First-time funds are more likely to be above average performers and many sophisticated investors are keen to gain exposure to the most promising of new firms, which have the potential to be the next generation of leading private equity real estate managers,” said Moylan.