Fund raising by realty focused PEs dips 70% in 2009

Funds raised by realty-focussed private equity firms declined significantly by 70 per cent so far this year as investors exercised caution for making fresh investment commitments.

A total of 93 funds reached a final close in 2009, receiving commitments of $40.5 billion. In 2008, 228 funds raised an aggregate $134.3 billion, according to global research firm Preqin.

As the credit crunch sent property prices into a downward spiral throughout 2009 many investors turned extremely cautious about commiting money in the asset class.

Also declining returns of many real estate funds made it difficult for managers to raise funds in 2009.

"Fund raising to date in 2009 has reached its lowest point in recent history. 2009 has also seen an increasing number of funds closing below original target, with a number of them closing with less than half the capital they were initially targeting," Preqin said.

Of all the funds that have closed during 2009, 77 per cent have closed below their original target size. While in the corresponding period in 2008 the figure was 46 per cent and in 2007 just 21 per cent of the funds fell short of their fund raising goals.

The report said in contrast to 2008 when fund raising never dropped below $20 billion in a single quarter, no quarter in 2009 to date has raised this amount.

According to Preqin, the second and third quarter of 2009 saw fund raising levels continuing to fall, with only $6.8 billion being raised in Q3, representing the lowest fund raising total since Q3 2004. To date in Q4 2009, 15 funds have raised $6.8 billion.

"2009 has been a challenging year for the private equity real estate industry. After years of uninterrupted success, the industry has hit difficult times; fund raising is down and fund managers have struggled to raise capital," it said.

However, the report noted that despite the declining trend in investment in 2009, the outlook for 2010 remains brighter.

The report said that despite declining returns over 2009, many investors did not lose confidence in the long-term benefit of investing in private equity real estate.

In fact many PE real estate investors, including some rather prominent institutions, decided to delay investing in the asset class until the markets had settled. Some delayed until Q4 2009, whilst others suspended programmes until 2010 or later.

"Despite (and in many ways because of) the global recession, real estate enters into the new year with a significant amount of funds on the road seeking large amounts of capital.