Fortress Investment Group LLC (FIG), Colony Capital LLC and Starwood Capital Group LLC are among a record number of private-equity firms raising real estate funds, according to people familiar with the process, driving down fees in a business reeling from earlier losses.
There are 441 private-equity firms raising real estate funds, 63 more than a year ago and almost twice the number in 2008, according to London researcher Preqin Ltd. Companies including Related Cos., the New York developer founded by Stephen Ross, and asset manager AllianceBernstein Holding LP (AB) have wooed investors and almost completed fundraising, said two of the people, who asked not to be named because the process is private.
“Despite the turmoil of 2008, sponsors can still make a compelling pitch that there are opportunities to invest in commercial real estate either by making loans or buying properties and debt,” said Ben Thypin, director of market analysis for Real Capital Analytics Inc. in New York. “Commercial real estate is still seen as a space for outsized returns.”
Managers, many still suffering losses on funds raised from 2005 through 2008 as property prices peaked, are back in the market because some pools are winding down after the typical three-year commitment period, said David Hodes, managing partner at New York advisory firm Hodes Weill & Associates. With firms seeking $150 billion for real estate, some are offering lower fees and committing more of their own capital, Preqin said in an August report.
‘Long, Dry Season’
“Managers that have performed well on a relative and absolute basis, treated their investors well throughout the financial crisis and demonstrated an ability to invest in this current environment will raise their next round of capital,” Hodes said in an interview. “For many of the others, it is going to continue to be a long, dry season.”
For funds raising $1 billion or more this year, the average management fee has fallen to 1.33 percent, according to Preqin, less than the industry standard of 1.5 percent and below the average charged by those funds in 2007 and 2008.
Real estate funds accumulated $135.2 billion in 2007 and $142.4 billion at their 2008 peak, or 21 percent of all private- equity raised that year, before dropping to $50.7 billion in 2009 and $44.2 billion last year, according to Preqin. Funds raised in 2007 faced an average annual loss of 14.2 percent as of December, and those raised in 2008 were down an average of 2.2 percent, Preqin reported.
At this time last year 378 private-equity firms sought $134 billion for real estate funds, according to Preqin, with the same number of managers seeking $199 billion in 2009.
Related is almost done raising $1 billion for a distressed real estate fund and has taken control of properties in Manhattan, Chicago and Florida, another of the people said. The developer, hired in 2008 by Deutsche Bank AG to oversee finishing the defaulted Cosmopolitan casino resort in Las Vegas, has told clients that, unlike many private-equity firms, it will manage distressed projects. That will allow it to limit fees by not relying on other operators, the person said.
AllianceBernstein, a New York-based fund manager with $456 billion in assets, is close to raising $1 billion for a real estate pool after securing a commitment from Singapore’s state- owned investment company Temasek Holdings Pte., one of the people said. That fund, led by former Goldman Sachs Group Inc. (GS) partner Brahm Cramer and iStar Financial Inc. President Jay Nydick, has offered to some investors to forgo the usual fee on commitments and only charge a fee on invested capital, according to an offering document.
Fortress, the New York-based buyout and hedge-fund firm run by Daniel Mudd, and Thomas Barrack’s Colony in Santa Monica, California, are amassing debt funds that will target real estate opportunities, the people said. Colony, which said it bought 370 million euros ($534 million) of troubled real estate loans from German banks this month, has raised about half of its $1 billion target, one of the people said.
Northwood Investors LLC, the New York firm started by former Blackstone Group LP (BX) executive John Kukral; Boston-based Rockpoint Group LLC; and Barry Sternlicht’s Starwood Capital in Greenwich, Connecticut, are each seeking about $2 billion for real estate funds, the people said.
Cerberus Capital Management LP, the New York-based private equity and hedge-fund manager, is in the early stages of marketing its next real estate fund, according to a person familiar with the process. The firm’s last property fund, which raised about $1 billion in 2008, exceeded its target of 20 percent annualized gains as of the first quarter, the person said.
Wall Street’s Exit
Representatives of Related, Cerberus, Colony, Fortress, Starwood, Rockpoint, AllianceBernstein and Temasek declined to comment. A Northwood representative didn’t respond to telephone calls.
Private-equity firms may benefit from diminished Wall Street competition, after some banks exited or were left to rebuild their real estate businesses when the credit crunch halted the flow of cheap debt financing and depressed property values starting in 2007, the year before Bear Stearns Cos. and Lehman Brothers Holdings Inc. collapsed.
Losses, manager turnover and a new regulatory environment limiting risky investments have affected Goldman Sachs’s Whitehall property funds and Morgan Stanley’s real estate investing business. Lehman Brothers, the largest underwriter of mortgage-backed securities at the market’s peak, filed for bankruptcy in September 2008 and is liquidating assets.
That void may help larger private-equity groups catch bigger targets.
$4 Billion Target
Brookfield Asset Management Inc. (BAM/A), which manages about $150 billion in assets including $76 billion of commercial property, is aiming to raise $4 billion for a global real estate fund, the company told analysts in May. The Toronto firm led an investor group including Bill Ackman’s Pershing Square Capital Management LP that brought mall owner General Growth Properties out of bankruptcy in November.
Blackstone in New York, the world’s biggest private-equity firm, with $159 billion under management, has said it’s raising its seventh real estate fund with a target of about $10 billion. The firm told investors in a letter yesterday it has already raised $4 billion, four months after kicking off fundraising.
Carlyle Group LP is gathering a new fund for U.S. property deals, said a person briefed on the plan who asked not to be named because the Washington-based fund is private.