March  2010  VOL.3

Foreign Exchange

Equity raising by opportunistic real estate funds jumped to US$17 billion in the second half of 2009, but the final capital closes for 26 non-listed vehicles came only after extended marketing periods. There was also a clear trend towards more small-cap funds, according to the latest research from Clerestory Capital, a New York-based real estate investment manager.

“The fund closings in the latter half of last year represented a substantial volume of capital, which was 115 percent higher than we recorded in the middle of 2009, but our research indicates that this was more a clearing of the gridlock than a real surge in new money from investors,” says Joanne Douvas, co-founder and managing principal at Clerestory.

Douvas says many of these funds began raising capital before the collapse of Lehman Brothers in September 2008. “There is also a clear trend towards more small-cap vehicles as the equity targets for larger funds are proving too daunting in this investment environment,” she says.

Clerestory’s research, which was conducted during the first two months of 2010, found that 20 of the 26 opportunistic real estate funds that closed in the second half of 2009 were small-cap and six were large-cap, representing US$8.1 billion and US$9.1 billion of equity, respectively.

Clerestory defines small-cap funds as those raising less than US$1 billion of equity and large-cap funds as those raising more than US$1 billion. The investment manager conducts a survey twice a year on opportunistic real estate funds that are in the market, soon to be in the market, on hold, or closed and investing.

Fourteen new small-cap funds seeking to raise US$5.3 billion in equity and one new large-cap fund looking for US$1 billion entered the market during the second half of last year. These new funds included nine focused on investment in markets in the Americas, four in Asia and two in Europe.

“We think the trend towards smaller funds is also partly due to the generally low transaction volumes in real estate investment markets and that capital raising will scale-up to the opportunities available once they present themselves,” says Tommy Brown, co-founder and managing principal at Clerestory. “With many notable fund managers out of the game, being sold, or having significant portfolio issues, these opportunities could fall to a new generation of managers.”