The big are getting bigger: Mega funds dominate capital raising for real estate

Large fund managers continue to dominate fund raising for real estate strategies across the globe, and they’re growing further.

January 28, 2020

Between them, the world’s three biggest funds last year raised US$43.5 billion, with Blackstone Real Estate Partners’ ninth global fund attracting US$20.5 billion alone.

With less funds closing in 2019 but more capital in the market, existing vehicles are getting bigger with an average size of US$625 million, according to Preqin.

So-called mega funds continue to dominate the field as the big continue to get bigger,” says Gianluca Romano, a managing director in JLL’s Capital Markets business.

A total US$151 billion was raised in 2019, beating Preqin’s 2008 record of US$148 billion.

And competition in the investment market continues intensify, Romano says.

“It’s an environment in which there are less deals but more capital being raised,” he says. “How to find opportunities will continue to be a challenge for fund managers with capital to deploy.”

In the coming months, fund managers, Romano says, will have to “work harder to put capital to work”. The option of alternative real estate sectors may continue to become more viable. But with so much capital raised, scale is key.

“Large scale deals and portfolios of scale are sought after at a time when just deploying in tranches of €50 million or €100 million is not going to do the trick,” Romano says.

Although dry powder fell for the first time since 2014, from US$331 billion to US$319 billion according to Preqin, the amount of undeployed capital remains well above long-term averages.

Fund raising this year is expected to be equally strong, with some 918 funds looking to raise capital for real estate strategies. “However, given only about 300 funds closed in 2019, it is reasonable to expect that many of the funds will fail to close, or reach their targets, or perhaps end up not being funds at all,” Romano adds.

But as institutional portfolios reach critical mass, “there’s also the possibility that we may now be closer to an expected move away from funds into separate accounts and joint ventures.”

Innovative investment strategies, such as operating partnerships, joint ventures and platform deal are now in play.

“Co-investments, joint ventures, separate accounts and even direct investments are increasing in popularity,” says Romano.

But the commingled fund is not going away just just yet.

“Japanese investors are still in the early stages of their geographic diversification and the fund model remains their current preferred structure,” says Romano.

“Likewise, there has been little sign that large Middle Eastern investors have increased their internal resources – usually a prerequisite for managing more direct-like structures – although some have given large mandates to gatekeepers to pursue co-investments,” he adds.

Preqin estimates that US$281 billion is being targeted by funds this year. For fund managers, the amount of funds out in the market raising could mean more funds fail to reach their final close, he adds. Last year, the number of vehicles reaching a final close fell by 36 percent to around 300.

Some smaller and mid-sized managers are pursuing the strategy of becoming sector or geographically-focused, with varying success, Romano adds.

“As we enter a new decade, investors will continue to demand more choice in investment structures from their managers.”