New research from Preqin demonstrates that despite a greater concentration of capital being raised among larger private real estate funds in recent years, smaller funds have often outperformed larger funds.
Funds of $1bn or more in size raised 56% of the total capital raised in 2013, compared to 29% of capital the year before, despite the relative outperformance of smaller funds in recent years. The heightened risk that often accompanies an investment in these vehicles, however, is likely to account for the low levels of current investment in smaller managers.
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With regards to experience, emerging managers on average have outperformed their more experienced counterparts for the entire period since the financial crisis. The PrEQIn Real Estate Index, which captures the average returns earned by investors in their private real estate portfolios, demonstrates that since December 2007, the index of first- or second-time funds exceeds the returns generated by other funds.
Other Key Facts:
- For every vintage year between 2005 and 2009, real estate funds of less than $500mn have posted higher median net IRRs than funds of US$1bn or more in size.
- For funds of 2000-2011 vintage years, 55% of funds less than $500mn in size have exceeded the median performance benchmark, compared to only 44% of funds of $1bn or more in size.
- Larger funds are generally less risky and perform closer to the median benchmark than smaller funds; the net IRRs of 2005-2011 vintage funds of US$1bn or more in size have a standard deviation of 15.5%, compared to 18.3% for funds that are less than US$500mn in size.
- First- and second-time fund managers have posted a median net IRR of 5.8% for funds of vintage years 2005 to 2011, compared with 4.9% for managers that manage between three and seven funds.
- Managers that manage eight or more funds have a standard deviation of net IRRs of 21.0%, compared to 18.1% for first- and second-time managers, suggesting that experience does not necessarily bring about consistent performance.
- Just 7% of capital raised in 2013 was by first-time fund managers, compared to 12% in 2012 and 18% in 2011.
- There are 135 first-time real estate fund managers in market raising a fund, targeting an aggregate US$27bn. This compares to 77 managers that have previously raised eight or more funds seeking an aggregate US$62bn.
Andrew Moylan, head of Real Assets Products, Preqin, said: "Smaller private real estate funds have frequently outperformed larger offerings in recent years, with newer firms also more likely to have outperformed their more established counterparts. There are likely to be many reasons for this, with smaller managers potentially more nimble when making investments and newer firms more motivated to prove their worth. Recent fundraising data shows the largest players have accounted for a growing proportion of all private equity real estate capital being raised. Many large, established players do have strong track records, and often institutional investors are looking to invest with managers that have evidence of generating consistent returns. However, those institutional investors that have the skill and resources to seek out attractive emerging managers have the potential to be rewarded for doing so."
