Ebook Private Equity Real Estate Funds: An Institutional Perspective
The importance of private equity real estate (“PERE”) funds has been growing dramatically in recent years. Through the first half of 2007, PERE funds continued to expand in terms of their number and average size. Although several high-profile takeovers of large publicly-traded real estate entities have underscored the influence of PERE funds, relatively little is known about them. Questions which have arisen regarding such funds include: what are PERE funds and what distinguishes them from other types of real estate investment vehicles? Why have they attracted so much investment capital? And, what are their prospects in a post credit crunch environment? These are among the issues we address in this paper. In addition, our research discusses why and how Canadian pension funds in particular, are making use of PERE fund vehicles within their investment portfolios.
We begin by noting that, until recently, there has been little research on PERE funds in Canada or elsewhere. This may be because their activity has not historically constituted a large portion of the overall real estate investment universe. It may also reflect a lack of available data because, as predominantly privately-held entities, PERE funds are not required to disclose details regarding their activities nor financial performance. Our findings are based on: (a) interviews with several PERE fund managers (both from the U.S. and Canada); (b) interviews with executives from Canada’s largest pension funds; (c) data compiled by Private Equity Intelligence Ltd., a British-based, global PERE fund database; and (d) relevant academic and popular publications.
Many industry observers believe that the proliferation of PERE funds can be explained by the availability of cheap debt. The advantage of inexpensive financing for leveraged buyers is clear. However, this does not explain why presumably prudent institutions are by far the largest category of investors in PERE funds. Certainly strong institutional demand for real estate product (what has been dubbed a “wall of capital”) is causing investors to look beyond traditional investment strategies. But perhaps a more important and permanent change, which might be described as “evolutionary”, is taking place.
Investors have been adopting increasingly active management approaches to real estate investing and portfolio management. It was not that long ago such investors viewed the need for industry-specific experience, specialized skills, and local market knowledge as impediments to real estate investing. Today, they view such attributes (either in-house or procured externally) as opportunities to: (a) expand into new markets; (b) diversify their holdings; and (c) enhance overall investment returns.
This change is particularly evident amongst the largest Canadian pension funds, most of which have substantial exposure to PERE funds. In general, their commitment to PERE funds reflects an appreciation of the role that management plays in the performance of real estate portfolios. This role consists of two parts: (a) identifying investment trends and opportunities at a macro level, and (b) implementing corresponding investment strategies at a micro level. Management in this context can be defined as human capital, which possesses the creative vision, motivation and expertise, to conceive and successfully execute investment strategies.
Contents
Introduction
Private Equity and Real Estate: A Perfect Match
Fund Structure
Origins and Evolution
Capital Flows
Performance
Risk and Risk Mitigation
A Case Study in Unlocking Value: Blackstone’s Acquisition of Equity Office
Private Equity Real Estate Activity in Canada
Outlook
Summary
Notes
Download
PDF Ebook Private Equity Real Estate Funds: An Institutional Perspective
Posted in :
