If one looks at Private Equity & Real Estate (PERE) assets, they’ve been growing substantially over the past decade. Since December 2007, PERE assets have more than doubled from over EUR3 trillion to EUR6 trillion.
In some respects, private equity has become a victim of its own success with approximately USD1 trillion in the form of dry powder (or capital yet to be invested). Factor in the increased level of competition as a result of large institutional investors directly investing, which is pushing valuations higher, and the net result is that it is becoming harder for PE and RE fund managers to effectively deploy capital today to deliver higher earnings multiples tomorrow.
As Bain & Company noted in their Global Private Equity Report 2018, multiples are at all-time highs, with around half of all companies acquired priced in excess of 11 times earnings before interest, taxes, depreciation and amortisation.
But despite this elevated level of competition, the global PERE marketplace appears stronger and more buoyant than ever. Just last year, CVC raised EUR15.5 billion in what was one of the largest European fund launches, while Apollo raised USD23.5 billion for the largest ever buyout fund. These are substantial numbers and the signs are that these ‘mega funds’ will continue to dominate the market as investors flock to the biggest and best names in the industry.
Looking at the capital raising environment for private equity, fundraising activity remained strong in the first quarter of 2018. Some 157 funds closed on USD117 billion in commitments according to EY’s April edition of its monthly Private Equity Capital Briefing report1.
While this represented a 33 per cent decline from the first quarter of 2017, EY notes that it was broadly in line with the first quarter of 2016, when USD114 billion was raised. The most popular form of PE vehicle is the buyout fund, accounting for 39 per cent of Q1 2018 capital inflows. Overall, buyout firms now have USD637 billion in capital ready to be deployed. That is a substantial number.
Within the global real estate space, The 2018 Capital Raising Survey2, published by INREV, ANREV and NCREIF, revealed that 2017 recorded a total of EUR152.3 billion in new capital raised globally by real estate investment managers; that is a 25 per cent increase on 2016.
Equity was raised for 895 vehicles, up from 733 the previous year, underscoring investor confidence in the asset class. European-focused RE funds were the trailblazers in 2017, raising EUR67.2 billion in capital, up from EUR56.6 billion in 2016. Of this total, European non-listed real estate funds enjoyed a record year, accounting for EUR35.1 billion.
In total, EUR152.3 billion of new capital was raised for non-listed real estate in 2017, up from EUR121.8 billion in 2016. According to INREV’s Capital Raising Survey 20183, pension funds accounted for just over one third (35.8 per cent) of that capital. European investors appear to be the most committed to investing in global real estate, accounting for EUR62 billion of the total amount raised and approximately 45 per cent higher than the amount allocated by North American investors; EUR34.2 billion.
If one was to analogise and compare the PERE space to individual stocks, from a cash flow perspective the fundamentals look strong and there is reason to be optimistic. Whether PERE funds, especially those operating in the large-cap and core real estate space, can effectively put all of their dry powder to work and select investments that, while expensive today, will continue to grow and improve their EBITDA, is the USD64,000 question.
This is a good problem to have. Over the next five years, managers who shrewdly source and select good investments and deliver attractive IRRs for their investors will, in this competitive landscape, prove themselves to be worthy winners. And fully deserving of their performance fees. Actively managed PERE funds that deliver genuine uncorrelated returns to traditional markets will be worth their weight in gold, as institutions increasingly seek out long-term yield generating investments to meet their liability targets.
And while much is made of direct investing, it is only the largest most sophisticated institutions – the likes of Canadian pension funds and Middle Eastern sovereign wealth funds – that have such a capability. The vast majority of investors will continue to rely on commingled fund vehicles, albeit with an eye on increasing their capital allocation via co-investment deals.
In that respect, 2018 and beyond will likely continue to be a period of continued net inflows and growth.
In the following pages, which Private Equity Wire has put together with TMF Group, you will find a variety of global insights from various TMF Group executives located in Europe, Asia Pacific and North America on the current PERE landscape. From investor allocation preferences to insights on German real estate and why, for example, Asia-focused RE funds are looking at the warehouse and logistics space, the report should reveal some interesting details for both GPs and LPs alike.
We hope you enjoy the report.
James Williams
Managing Editor, Private Equity Wire
2. https://www.inrev.org/news/press/capital-raised-real-estate-investment-increases-25
3. https://www.inrev.org/system/files/2018-04/INREV-Capital-Raising-2018-Infographic.pdf
