React News feature: Record year in store for opportunistic fundraising – where will all the money go?

Originally published by React News. Written by Guy Montague-Jones.

Counterintuitively, given the weak market backdrop, 2022 could turn out to be a record year for opportunistic real estate fundraising.

So far this year, Preqin data shows that more than $26bn has been raised globally across 56 funds. This would point to a decidedly average year but the picture changes dramatically when factoring in funds that are currently raising.

Blackstone and Brookfield Asset Management are both about to close mega funds. The former is on course to raise just over $30bn for Blackstone Real Estate Partners X after pulling in $24.4bn in just one quarter and Brookfield is well on the way to its target of more than $17bn for Brookfield Strategic Real Estate Partners IV, having raised $14.5bn so far.

When added to what has been raised already this year, the two funds would bring total opportunistic fundraising to $73bn – higher than any year in the past decade apart from 2019 when $79bn was raised.

Considering some of the other sizeable funds in the market including Blackstone Real Estate Partners Asia III, TPG Real Estate Partners IV and Harrison Street Real Estate Partners IX, it is more than likely that this milestone will be surpassed comfortably.

Bright spot in tough fundraising market

The blockbuster year says more about the trend for the big getting bigger than it does the state of the fundraising markets more widely.

For most, raising money this year has been tough going given the volatile political and economic backdrop.

Gianluca Romano, JLL’s global head of indirect capital research, describes it as the “most challenging year for fundraising since likely 2014”.

Romano notes that although there are more funds in the market than ever, they are taking longer to close with Preqin showing the average time in the market rising to a record high of 20 months.

However, investors are more receptive to opportunistic strategies in the current market than some others.

“Given the inflationary environment and expanding cap rates that challenge the pricing of lower risk profiles, it is not surprising that in a low overall fundraising year opportunistic is the preferred risk profile, particularly among US investors,” says Romano.

“The current environment is expected to generate dislocations; opportunistic managers are more excited about coming investment opportunities than they have been for some time.”

A question of timing

There is the potential for this year’s vintage of opportunistic funds to achieve outsized returns if they get their timing right.

Charles Allen, head of UK real estate at Fiera, which is one of the few UK-based fund managers to have raised an opportunistic fund this year, says much of the capital being raised today is likely to sit on the sidelines until more distress emerges and prices fall.

“People will be looking to call the bottom of the market, but for me, that’s not going to be a 2022 play,” he says.

“That will likely be 2023. If it’s a light-touch recession, it could be early next year but could be later if things continue to look bad on the inflation front.”  

Even fund managers raising billions for new funds will not be under pressure to deploy quickly. Blackstone’s opportunistic funds, for example, are structured so the firm has five and a half years to invest the capital raised. This helps avoid a scenario where the firm would be a forced buyer.

There is then the question of where all the money will be invested. In contrast to the pandemic, which hit retail and leisure, but left other sectors relatively unscathed, Allen predicts that there will be “pockets of distress in lots of different places” this time around.

This is because the current downturn is driven by the rising cost of debt, which is not a sector-specific issue. Pricing has already started to take a step down in the logistics market, which had until recently been on a seemingly unstoppable rise.

Evolution not revolution

The likelihood that distress will emerge across different parts of the market and the fact that the outlook for different sectors is less clear cut that it once was does raise the question of whether fund managers will start seeking out a wider range of opportunities.

In recent years, opportunistic strategies have been focused on an increasingly narrow range of sectors with logistics and residential development dominating thanks to the outsized returns on offer in “beds and sheds”.

This is reflected in the strategies of the three main UK and European opportunistic funds to have closed this year – Fiera Real Opportunity Fund V, Harrison Street European Property Partners III and PLP UK Logistics Venture 2. All are focused on residential or logistics or both.

As the market weakens, fund managers will be alert to opportunities outside their normal fishing grounds where assets are mispriced. However, it is likely to be a question of evolution rather than revolution for most.

Fiera’s Allen says the firm’s new opportunistic fund will maintain its focus on residential and logistics.

“We’re always on the lookout for more one-off opportunistic deals but as a business we take a macro top down approach, focusing on mega trends.”

On a larger scale, it is likely that Blackstone will do the same with its new opportunistic fund.

Talking more broadly about the Blackstone’s investment themes, Kathleen McCarthy, the firm’s global co-head of real estate, said in an interview with React News last month: “Logistics, life sciences, rental housing and hospitality account for 80% of what we own. For those markets that are the most supply constrained and have the greatest demand, we have even more conviction around those.”

As for Brookfield, it already casts its net somewhat wider than Blackstone has in recent years and is likely to continue in the same vein with investments in the traditional sectors of office, retail and logistics as well as more alternative markets like life sciences and student accommodation. The firm has had success in both building up platforms in particular sectors and making contrarian bets.

As Dominic Williamson, a senior vice president at Brookfield, recently told React News following its acquisition of Hibernia REIT: “Some of our most interesting opportunities have been acquired over the past few years when others were not looking to invest.”

If nothing else, there are likely to be plenty of opportunities to invest over the next couple of years when others are sitting on their hands.