SPECIAL REPORT Fund Managers Flush With Capital, but Not Opportunities Capital, capital everywhere, but no place to invest. Number of Active Funds That’s the quandary facing managers of high-yield real estate funds. 488 466 466 By any measure, their industry is booming, with both the number of vehi- 445 427 429 425 440 cles and the amount of equity commitments at record levels. But finding suit- 415 406 able investments for all that capital is becoming harder and harder, because the long-running bull market has driven valuations sky-high. As a result, fund managers are lowering their return goals and sitting on an unprecedented hoard of uninvested capital. Those are key findings ofReal Estate Alert’s 22nd annual review of closed- end commingled funds that seek yields of at least 10% by investing in com- mercial real estate. The review identified a record 488 active vehicles, up 5% from 466 a year ago. Those funds are managed by a record 392 operators, up from the previous high of 374 last year. They have set an aggregate $339.9 billion equity goal and 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 have already raised $261.3 billion of that amount (or slightly more than three- quarters) — also new highs. But a whopping 72% of those commitments, or $186.9 billion, is still unin- vested. That tally is up 14% from a revised $164.5 billion of dry powder last Uninvested Equity ($Bil.) year and nearly double the $97.9 billion level in 2015. 187 164 The reason why is no mystery: Fund managers see fewer opportunities that 161 fit their return goals. “I’ve heard people say there are too many dollars chasing 140 too few deals every year for virtually my whole career and certainly since the 124 market picked up,” said Alan Pardee, co-founder of New York placement agent 98 97 96 Mercury Capital. “But we’re at a crescendo now, to be sure.” 84 84 Indeed, many pros think that valuations are at or even past the peak in many markets. That sentiment is evidenced by the fact that large property sales across asset classes fell by 10% last year, albeit still logging the third-highest level MARCH 14, 2018 ever, according to Real Estate Alert’s 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Deal Database, which tracks sales of 6 Master List $25 million and up. Nevertheless, institutional inves- 21 Opportunity Funds tors, after considering the alternatives, continue to shovel money at fund Targeted Annual Yield 29 Value-Added Funds operators, especially the biggest shops. 39 Core-Plus Funds “Despite the perception that real 16.9% 16.8% estate is late cycle and at historically 16.5% 16.7% 42 High-Yield-Debt Funds high valuations, institutions are look- 16.7% 16.2% 16.4% 46 Funds of Funds ing across all strategies, including public equities, fixed income and alter- 15.7% 47 Funds That Fell Short of Target natives, and seeing the same cycle and 15.8% pricing dynamics,” said Doug Weill, 47 Funds on Hold or Canceled co-founder of New York advisory shop 15.1% Hodes Weill & Associates. 47 Funds That Reduced Equity Goal “In that See FUND on Page 2 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 March 14, 2018 Real Estate 2 ALERT Largest Active and Planned Commingled Real Estate Funds Equity Equity Equity Goal Raised Invested Final Vehicle Manager Type ($Mil.) ($Mil.) ($Mil.) Close 1 Blackstone Real Estate Partners 8 Blackstone Opportunity $15,800 $15,800 $10,000 2015 2 Brookfield Strategic Real Estate Partners 3 Brookfield Asset Management Opportunity 10,000 9,047 Pending 3 Blackstone Real Estate Partners Europe 5 Blackstone Value-added 9.676 9,676 3,722 2017 4 Starwood Opportunity Fund 11 Global Starwood Capital Opportunity 7,556 7,556 1,000 2018 5 Blackstone Real Estate Partners Asia 2 Blackstone Opportunity 5,900 5,900 0 Pending 6 Lone Star Real Estate Fund 5 Lone Star Funds High-yield debt 5,800 5,800 2016 7 Carlyle Realty Partners 8 Carlyle Group Opportunity 5,011 5,011 230 Pending 8 Blackstone Real Estate Debt Strategies 3 Blackstone High-yield debt 4,803 4,803 2,400 2016 9 Pimco Bravo Fund 3 Pimco High-yield debt 4,600 4,600 700 2017 10 Broad Street Real Estate Credit Partners 3 Goldman Sachs High-yield debt 4,200 4,200 2018 11 Rockpoint Real Estate Fund 5 Rockpoint Group Opportunity 3,300 3,300 1,700 2016 12 Brookfield Real Estate Finance 5 Brookfield Asset Management High-yield debt 3,000 3,000 442 2017 12 TPG Real Estate 3 TPG Value-added 3,000 0 0 Pending 14 Oaktree Real Estate Opportunities Fund 7 Oaktree Capital Opportunity 2,920 2,920 450 2016 15 Westbrook Real Estate Fund 10 Westbrook Partners Core-plus 2,850 2,850 1,425 2016 16 North Haven Real Estate Fund 9 Global Morgan Stanley Opportunity 2,730 2,730 2017 17 KSL Capital Partners 4 KSL Capital Opportunity 2,600 2,600 243 2015 17 Landmark Real Estate Fund 8 Landmark Partners Fund of funds 2,600 2,600 650 Pending 19 AG Realty Fund 10 Angelo, Gordon & Co. Value-added 2,500 0 0 Pending 20 Partners Group Real Estate Secondary 2017 Partners Group Fund of funds 2,300 1,400 Pending Aggregate Equity Goal ($Bil.) Fund ... From Page 1 340 312 311 322 context, on a relative basis, real estate looks favorable from a 279 risk-return standpoint.” 258 Call it “the CIO’s dilemma,” added William Thompson, co- 241 244 239 223 head of the capital-advisory group at New York advisory firm Greenhill & Co. “Everything is expensive, but many are conclud- ing that real estate is one of the least-worse options.” The slowing deal pace could force fund operators to ask limited partners to extend timeframes for making invest- ments, according to Weill. Likewise, some operators may seek permission to hold investments longer than planned to avoid selling at below-peak pricing or before a value-added plan is executed. 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 “We have already seen a few end-of-fund-life restructurings, and we expect to see more over the next several years,” he said. REAL ESTATE ALERT SPECIAL REPORT With fewer attractive high-yield plays available, investment managers are lowering their promised returns. Thompson said Telephone: 201-659-1700 www.REAlert.com operators are moving “to the middle on strategy as the market Richard Quinn Managing Editor [email protected] gets more defensive and tactical.” Evan Grauer Database Director [email protected] Real Estate Alert’s review bears that out. The weighted aver- Robert E. Mihok Database Manager [email protected] age yield goal of active funds had its largest one-year decline Real Estate Alert (ISSN: 1520-3719), Copyright 2018, is published weekly by ever, plunging to 15.1% from 15.7% a year ago, amid an Harrison Scott Publications Inc., 5 Marine View Plaza, Suite 400, Hoboken, increased emphasis on lower-yielding strategies. NJ 07030-5795. It is a violation of federal law to photocopy or distribute The percentage of equity sought for the highest-risk cate- any part of this publication (either inside or outside your company) without first obtaining permission from Real Estate Alert. Subscription rate: $3,697 gory — opportunity funds — fell to 36.9%, from 41.6% a year per year. Information on advertising and group-license options is available ago. That was the lowest level since the review was expanded upon request. in 2003. Conversely, lower-yielding value-added allocations See FUND on Page 3 March 14, 2018 Real Estate 3 ALERT Number of Funds, by Category Equity Goals, by Category 2012 2013 2014 2015 2016 2017 2018 2012 2013 2014 2015 2016 2017 2018 (#) (#) (#) (#) (#) (#) (#) (%) (%) (%) (%) (%) (%) (%) Opportunity 193 181 184 180 162 167 142 Opportunity 56 55 52 48 42 42 37 Value-Added 125 128 142 147 168 171 210 Value-Added 22 22 23 23 26 27 33 Core-Plus 30 27 36 38 38 44 55 Core-Plus 5 6 6 6 8 8 8 High-Yield Debt 59 49 49 56 62 68 70 High-Yield Debt 15 15 16 19 21 20 19 Fund of Funds 22 21 14 19 15 16 11 Fund of Funds 3 3 2 4 3 4 3 TOTAL 429 406 425 440 445 466 488 TOTAL 100 100 100 100 100 100 100 Fund ... From Page 2 reached a 10-year high, at 33%, up from 26.9%. The three other catego- ries remained relatively flat — core- plus (8%), high-yield debt (19.3%) and funds of funds (2.8%). The figures are similar for the amount of equity already raised. Opportunity funds have corralled RCM Deal Center 41.5% of committed equity, the low- est figure since 2007 and well below the 62.5% peak in 2012. Accord- for Investors ingly, vehicles with lower yield tar- gets have garnered the largest shares Never miss another deal. of aggregate equity since 2007 — 28.7% for value-added funds and 7.7% for core-plus funds. Real Estate Alert’s review tracks closed-end property and debt funds that solicit U.S. investors and target annual net returns of at least 10% after fees. Vehicles are considered active if they are still raising capi- tal or if they have already held final closes but have invested less than 75% of their equity. So each year, a rotating group of funds is counted.