Private equity real estate funds have stepped up to be a major source of financing for the commercial real estate industry—and a bigger allocation for investors. However, fund managers may face a tougher road ahead for fundraising in the near term as capital flows to the sector slow.
Debt strategies have moved from the fringe to a more established and accepted part of the commercial real estate investment universe over the past several years. That shift has generated a significant wave of capital. According to London-based research firm Preqin, global private equity real estate debt funds have raised about $165.6 billion since 2013.
“Over the last three years in particular we’ve seen a massive amount of capital allocated to debt funds,” says Todd Sammann, executive managing director and head of credit strategies at CBRE Global Investors. The vast majority of that capital is targeting double-digit returns and is almost entirely allocated to closed-end funds. “The industry has seen fundraising trail off a little bit in 2019, which is not particularly surprising given the amount of capital that was formed,” says Sammann.
According to Preqin, the volume of capital raised by debt funds appears to have peaked at $33.7 billion in 2017. Fundraising edged lower to $29.4 billion in 2018 and has dropped more sharply in 2019, with fundraising through Nov. 7th totaling $15.6 billion.
That decline comes even as the broader private equity real estate fund market is enjoying robust capital flows. As of Nov. 7th, that global market had raised $138.2 billion year-to-date, which puts it on track to exceed the $146.1 billion raised in 2018 and likely to break the record of $147.5 billion raised in 2008, according to Preqin’s Q3 real estate report.
“There is no doubt that what Preqin is reporting, to a certain extent is true, that the appetite may not be there. But I also think that will rebound,” says Zac Barnett, co-founder of Fund Finance Partners, a debt advisory firm for private equity fund sponsors. “Private equity real estate debt doesn’t seem to be going anywhere. It fills a need, particularly when crossing over to the infrastructure space where there are very few banks that are able to play.”
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