Capital raising by opportunistic real estate funds globally fell sharply during the first half of 2009, as institutional investors became far more risk adverse and fund managers turned away from emerging property markets in particular, according to the latest research from Clerestory Capital Partners, a New York-based real estate investment manager.
Joanne Douvas, Co-Founder and Managing Principal at Clerestory said: "New opportunistic funds have notably shifted away from targeting growth in emerging markets. Fund managers are instead seeking to take advantage of the apparent distress in mature markets where they believe they can achieve better returns with less risk. Although the opportunities are maturing, we believe it is still early to be raising capital, or to be investing."
Only 11 small-cap (SC) Opportunistic funds and two large-cap (LC) Opportunistic funds reached fund closure by the end of the second quarter, representing a total of $4.0 billion in equity. This was 56% down from the fourth quarter of 2008, although due to variations in the dataset and timing of the data collection this is indicative of the broad trend rather than being strictly statistically comparable.
Many of these funds had started their capital raising process during the first part of 2008 and Clerestory can only identify a handful of opportunistic funds that have reached a first close since the Lehman Brothers collapse in September last year.
Clerestory defines SC-Opportunistic funds as those raising less than $1 billion of equity and LC-Opportunistic as those raising more than US $1 billion. The investment manager performs a market update twice a year on opportunistic real estate funds that are in the market; soon to be in the market; on hold; or closed and investing.
Tommy Brown, Co-Founder and Managing Principal at Clerestory said: "We've seen a large number of funds emerge to target distressed opportunities stemming from the dislocation in the real estate markets during the credit crisis, but not many of them appear to have been successful in either raising capital or making investments. A lot of funds have been put on 'hold' or withdrawn altogether, particularly in the emerging markets."
In its update of the opportunistic real estate funds' universe carried out in July and August, Clerestory identified a total of 91 SC-Opportunistic funds seeking to raise approximately US $46 billion in capital and 25 LC-Opportunistic funds seeking to raise US $63 billion in capital.
Some 38 SC-Opportunistic funds seeking US $14.5 billion and nine LC-Opportunistic funds seeking US $21 billion were classified as either "planned but did not materialize" or "on hold" in the second quarter of 2009. Emerging market funds appear to have been hit hardest in the current capital raising environment, accounting for 78% of the funds that were placed in these two categories.
It remains to be seen if many of these funds will be able to raise enough capital to be viable and the next few months will be critical as to whether these vehicles come back into the market or are pulled altogether until the next cycle.
Fund investors continue to seek relief from future capital commitments and are also trying to raise cash by offering their shares in vehicles on the secondary market, but transaction volume is low in the prevailing difficult real estate investment market conditions.
Source: Bellier Financial
