Opportunistic funds are rapidly losing their status as kingpins of the distressed real estate market, likely hurting their fundraising abilities in the next market cycle, as banks get savvy with problem property debts.
While managers such as Blackstone and Orion Capital raised hundreds of billions of dollars to capitalise on the worst market slump in years, most have yet to find the cut-rate deals seen after the 1990s US savings and loans crisis.
‘The lesson learned by the opportunity funds in the 1990s was ‘I should have bought more’. The lesson learned by the banks was ‘I should have sold less’,’ said Struan Robertson, global co-head of Morgan Stanley real estate investment banking.
Opportunity funds will have to accept fierce rivalry and a much smaller role in the market from now on because it has got better at managing so-called dysfunctional phases, experts said.
The result is that at end-March, US$194 billion of the cash raised by private equity real estate funds, including opportunity and distressed debt funds, over the past few years has yet to be invested, data from research house Preqin showed.
Multi-billion dollar state bailouts like the US Troubled Asset Relief Program and Germany’s SoFFin have helped banks avoid big firesales, the lifeblood of opportunity funds, as global commercial property values plunged in the recession.
‘The banks have been very different this time around than they were in the early 90s … they do not want to be seen to be stupid by selling to Cerberus, LoneStar, Blackstone, Carlyle,’ Internos Real Investors’ executive chairman, Jos Short, said.
The funds, by contrast, argue state-financed interventions in banks are delaying the property market’s return to health, by keeping properties from being sold at their true market values.
‘Governments have got too involved in the destinies of the banks, and that is definitely hurting and stalling the market recovery today,’ Wilson Lee, founding partner at First Growth Real Estate Capital, told a conference last week.
‘I think the government should let a few more banks go down … if you have to cut off a few fingers to save the body, that’s the right thing to do,’ said Mr Lee, a former managing director at ING Real Estate Investment Management.
As the ‘vulture’ funds have a typical life of seven years, including a three-year investment period, managers may find the recession-driven window of opportunity closes before they settle on new investment strategies, forcing them to return capital.
Fears abound that investors are growing impatient with the funds’ inertia, and may shy from supporting new fundraisings, unless they are reassured their capital can be put to work. The Preqin data showed private equity funds raised US$42 billion in 2009, the lowest annual amount since 2004.
Preqin senior real estate analyst Stuart Taylor said funds are typically more nimble than core asset-focused pension and insurance funds, meaning they can quickly shift gears as the market adjusts and exploit emerging opportunities.
‘What opportunistic funds are increasingly doing to combat the situation in the market is to widen their scope. A lot of them are now incorporating debt or distressed asset strategies within the vehicles,’ Mr Taylor said.
In Europe, for instance, property consultancy DTZ estimates a gulf between demand for real estate debt and credit offered by banks will grow to 115 billion euros (S$217 billion) in the next two years.
Funds are also looking beyond Europe for opportunities, a Clerestory Capital Partners study showed, finding that of 15 opportunity funds launched in late 2009, nine were focused on the Americas, four on Asia, and two on Europe.
Source: Business Times, 7 Apr 2010
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