Preqin Special Report: Real Estate Co-Investment Outlook

Transcription

1 Content Includes: Preqin Special : Real Estate Co-Investment Outlook Fund Manager Perception March 2016 Managers recognize the importance of coinvestments in building strong relationships with investors. Co-Investment Activity Majority of managers currently offer coinvestment rights to investors. The Co-Investment Relationship What are the requirements for LPs to qualify for coinvestment rights? Investors Investor appetite for co-investments grows; exposure to attractive assets is key appeal.

2 Preqin Special : Real Estate Co-Investments Download the data pack: Foreword Recent years have seen an increase in investors seeking real estate exposure through alternative routes to market to commingled funds. A co-investment structure can offer investors more exposure to attractive assets, reduced fees, the opportunity to put large amounts of capital to work and a greater degree of control over their investment portfolio, while still accessing the skill and pipeline of deals of third-party fund managers. In order to fi nd out more about this growing area of the asset class, we have surveyed 75 active real estate fund managers to better understand the changing levels of co-investment participation and fi nd out their views on the perceived risks and attractions. Furthermore, this information is enhanced by the results of our survey of 100 institutional investors, as well as data taken from the in-depth profi les of more than 5,000 institutional investors featured on Preqin s Real Estate Online. Real estate fund managers are recognizing how important co-investment rights are becoming to investors; our survey found that most managers feel offering co-investment rights is important during fundraising, and the vast majority currently offer or are considering offering co-investment rights to their investors. In fact, 41% of respondents stated that more than 8 of investors in their latest funds were offered co-investment rights in 2015, compared with just 9% of respondents stating this in The main motivations for investors to seek out co-investments are greater exposure to attractive assets, the prospect of greater returns and lower fees. Most LPs actively co-investing reported that their co-investments have delivered superior returns to their real estate fund commitments, although many feel it is too early to tell, indicating that this remains a new approach for numerous institutions. Reduced fees are often attractive to LPs, with the majority of GPs also reporting that they charge lower management fees and carried interest on co-investment arrangements than pooled funds, or charge no fees at all. To fi nd out more about Preqin s Real Estate Online, or for more information on co-investments, please do not hesitate to contact us at info@preqin.com or at our New York, London, Singapore, San Francisco or Hong Kong offi ces. Contents Fund Manager Perception of Co-Investments 3 Fund Manager Co-Investment Activity 4 The Co-Investment Relationship 6 Investor Appetite for Co-Investments 7 Investor Co-Investment Activity 8 The Leading Source of Intelligence on the Real Estate Industry Preqin s Real Estate Online is the leading source of intelligence on the private real estate fund industry. This constantly updated resource includes details for all aspects of the asset class, including net-to-investor fund performance, fundraising information, institutional investor profi les, fund manager profi les and more. For more information, please visit: /reo All rights reserved. The entire contents of Preqin Special : Real Estate Co-Investment Outlook, March 2016 are the Copyright of Preqin Ltd. No part of this publication or any information contained in it may be copied, transmitted by any electronic means, or stored in any electronic or other data storage medium, or printed or published in any document, report or publication, without the express prior written approval of Preqin Ltd. The information presented in Preqin Special : Real Estate Co-Investment Outlook, March 2016 is for information purposes only and does not constitute and should not be construed as a solicitation or other offer, or recommendation to acquire or dispose of any investment or to engage in any other transaction, or as advice of any nature whatsoever. If the reader seeks advice rather than information then he should seek an independent fi nancial advisor and hereby agrees that he will not hold Preqin Ltd. responsible in law or equity for any decisions of whatever nature the reader makes or refrains from making following its use of Preqin Special : Real Estate Co-Investment Outlook, March While reasonable efforts have been made to obtain information from sources that are believed to be accurate, and to confi rm the accuracy of such information wherever possible, Preqin Ltd. does not make any representation or warranty that the information or opinions contained in Preqin Special : Real Estate Co-Investment Outlook, March 2016 are accurate, reliable, up-to-date or complete. Although every reasonable effort has been made to ensure the accuracy of this publication Preqin Ltd. does not accept any responsibility for any errors or omissions within Preqin Special : Real Estate Co-Investment Outlook, March 2016 or for any expense or other loss alleged to have arisen in any way with a reader s use of this publication Preqin Ltd. /

3 Download the data pack: Preqin Special : Real Estate Co-Investments Fund Manager Perception of Co-Investments Discussions surrounding the disintermediation of real estate are becoming more common, and increasing numbers of institutional investors are exploring alternatives to pooled fund commitments. Refl ecting this trend, the majority of real estate fund managers feel that it is important to offer potential investors co-investment rights when seeking new commitments, and that this increases the chances of a successful fundraise (Fig. 1). Given this, it is perhaps unsurprising that 57% of fund managers expect to offer more co-investment opportunities to investors in 2016 than they did in 2015, while just 2% expect to offer fewer. We asked real estate fund managers what they perceive to be the positives and negatives of offering LPs co-investment rights. Just of respondents stated that there are no benefi ts in offering LPs co-investment rights (Fig. 2). The survey revealed that the most important benefi t for fund managers is that it helps build a stronger relationship with their investors, with co-investments likely to help establish longterm partnerships, while access to additional capital is also an important consideration for a large proportion of fi rms. Co-investments do present managers with challenges however, with the additional costs associated with reporting or setting up special purpose vehicles named by 44% of fi rms as a downside (Fig. 3). The potential for a deal to be delayed, the problems Fig. 2: Fund Managers Perceived Benefits of Offering Investors Co-Investment Rights Fig. 1: Fund Managers Views on the Importance of Being Open to Offering Co-Investment Rights for a Successful Fundraise 29% 35% associated with the timing or rights of co-investors and the loss of control of an investment were also named as important considerations. 29% Vitally Important Very Important Quite Important Not Important Fig. 3: Fund Managers Perceived Disadvantages of Offering Co-Investment Rights Builds a Stronger Relationship with Investors Access to Additional Capital for Deals Improves the Chance of a Successful Fundraise Opportunity to Better Manage Risk Opportunity to Enhance Product Differentiation Benefits the Asset 15% 15% 37% 49% 71% 82% Additional Costs/Resource Slows Deals Process Differences in the Terms or Rights of Co-Investors Co-Investors Have More Control over the Investment Negative Impact on Relationships with Other Investors 2 44% 41% 39% 39% Other 2% Other 7% None None Proportion of Respondents Proportion of Respondents Data Source: View comprehensive information on more than 3,200 private real estate fund managers on Preqin s Real Estate Online. Detailed information includes total capital raised; estimated dry powder available for investment; strategy, property and geographic investment preferences; funds closed historically and in market; historical performance; known investors and direct contact details for key decision makers. For more information, please visit: /reo 2016 Preqin Ltd. / 3

4 Preqin Special : Real Estate Co-Investments Download the data pack: Fund Manager Co-Investment Activity Fund Manager Offerings Nearly two-thirds (63%) of real estate fund managers surveyed offer co-investment rights to their investors, and a further 25% are considering doing so in the future (Fig. 4). No respondents had previously offered co-investments in the past that do not offer them any longer. Just 12% of fi rms do not expect to offer co-investments, refl ecting how prevalent these structures are within the real estate fund market. Syndicated co-investments, whereby a fund manager sells down a portion of equity to select LPs after a deal has been completed, are the most prevalent type of co-investments, offered by 58% of surveyed real estate fund managers (Fig. 5). Only 19% offer the opportunity for LPs to co-lead, where Fig. 4: Proportion of Fund Managers Offering Co- Investment Rights to Their Investors the investor will contribute a similar share to the fund manager and has a leading role in deal origination. An even smaller proportion (17%) offer the co-sponsorship model, which requires a signifi cant level of due diligence from investors at an early stage in the deal process. It is noteworthy that these latter two options, which allow investors more active roles alongside fund managers, are the least prevalent. Fig. 6 shows the typical stage in the investment cycle at which fund managers offer co-investment rights to LPs. The most common point at which investors are offered co-investment rights is during the fundraising process or during the bid for deals. It is rarer for fund managers to offer them at fi nal close of the fund, with only 3% of respondents doing so. Fig. 5: Types of Co-Investment Opportunities Fund Managers Offer Investors 7 25% 12% Offer Co-Investment Rights 63% Considering Offering Co-Investment Rights Previously Offered Co-Investment Rights but Do Not Anymore Do Not Offer Co- Investment Rights % 33% 19% 17% Syndicated Co-Investment Co-Underwrite Co-Lead Co-Sponsor Fig. 6: Typical Stage in Investment Cycle at Which Fund Managers Offer Co-Investment Rights to LPs Fig. 7: Proportion of Investors Offered Co-Investment Opportunities by Fund Managers, 2014 vs % During Fundraising Process 29% During Bid for Deal 21% Post-Deal Completion Pre-Marketing of Fund 3% At Final Close of Fund Proportion of Investors Offered Co-Investment % 41% % % % % 1-1 9% 29% 41% Preqin Ltd. /

5 Download the data pack: Preqin Special : Real Estate Co-Investments Co-Investment Activity in 2014 and H In order to track the changes and developments in the private equity real estate co-investment space, we asked fund managers about their activity in 2015 compared to 2014, with the results clearly illustrating the growth of co-investments in a relatively short period of time. Fig. 7 demonstrates that GPs are generally offering an increasing proportion of their LPs co-investment opportunities; between 2014 and 2015, the proportion of fund managers offering 0-4 of their LPs co-investment opportunities has dropped, and in turn, the proportion offering these opportunities to more than 8 of their investors has risen considerably. In 2014, 9% of real estate fi rms were offering more than four out of fi ve investors co-investments this rose to 41% in However, there appears to be some disparity in the proportion of investors approached with co-investment opportunities and those that actually committed to such transactions with the fund manager. Fig. 8 shows that, surprisingly, the greatest proportion (39%) of real estate fund managers stated that none of the investors they offered co-investment opportunities to in 2015 took them up, albeit a reduction on the 61% of LPs that stated the same in Generally, LP co-investors make up less than half of the equity in a deal; however, the proportion of fund managers that indicated their LP co-investors contributed over 4 of the equity in real estate deals rose from 54% in 2014 to 72% in H (Fig. 9). Conversely, no real estate fi rms had their co-investing LPs committing less than 2 of the equity for deals in H1 2015, compared to 18% in Fig. 9: Proportion of Equity from LP Co-Investors in Deals, 2014 vs Fig. 8: Proportion of Investors that Actually Co-Invested with the Fund Manager after Being Offered the Opportunity, 2014 vs Proportion of Investors Offered Co-Investment that Actually Co-Invested % 28% Size of Co-Investment Deals Fig. 10 shows the average proportion of deals completed in 2014 and 2015 that included LP co-investors by deal size. The overall trend is that smaller deals (those less than $500mn in size) are more likely to include an LP co-investor. Our survey results show that there have been slight changes within each size bracket moving from 2014 to 2015, with the most notable shift in the category of deals worth $50-99mn. Of all $50-99mn real estate deals completed by respondents in 2014, 47% of these included LP co-investors, compared with just 21% in % 61% Fig. 10: Size of Deals Completed that Included LP Co-Investors, 2014 vs Proportion of Equity 5 or More 40-49% 30-39% 20-29% 11-19% 18% 27% 27% 27% 3 45% Average Proportion of Deals Including Co-Investors % 5 47% 47% 43% 21% 27% 27% 21% 21% % Less than $50mn $50-99mn $ mn $ mn $1bn or More Deal Size Share Data with Preqin Contribute data to Preqin to ensure the 7,800 investment professionals using Preqin Investor Network have access to the most accurate and up-to-date information on your fi rm. For more information, please visit: /sharedata 2016 Preqin Ltd. / 5

6 Preqin Special : Real Estate Co-Investments Download the data pack: The Co-Investment Relationship Preqin s survey results highlighted the differing experiences real estate fi rms have when offering co-investments. For example, the largest proportion (41%) of fund managers stated that the capital co-invested by their investors typically equates to 1-2 of the LP s original fund commitment (Fig. 11). However, for 7% of surveyed fund managers, the co-investment capital equated to more than 10 of their investors original fund commitments. There can be a number of prerequisites for investors when qualifying for co-investment rights. The largest proportion of fund managers rated both the speed at which the LP can evaluate and agree to co-investment and the size of the fund commitment as high importance, with over half of respondents stating this as a requirement to qualify for co-investment rights (Fig. 12). The competitive bidding process and the fact that several co-investors may be waiting on one another s Fig. 11: Fund Managers Observations of Capital Typically Co-Invested Alongside Fund s by Their LPs decisions means that there is some pressure on timing, with fund managers often looking for a verbal commitment from investors within as little as two to three weeks. Any previous expression of interest in co-investing by the investor is of relative signifi cance, highlighted by two in fi ve fi rms, while 32% of fund managers have requirements relating to LP reliability. Twenty-seven percent of fund managers have no requirements at all and will offer co-investment opportunities to all investors. GPs report that only a certain proportion of their LPs actually request to invest alongside them. The largest share (45%) of respondents stated that only up to a fi fth of investors in their most recent fund requested co-investment rights (Fig. 13). On the other hand, 13% of respondents saw more than 8 of their most recent fund investors do so. Fig. 12: Requirements for Investors to Qualify for Co- Investment Rights 1 7% 41% 1-2 of Fund 21-4 of Fund 41-6 of Fund Proportion of GP Respondents % 51% 41% 32% 27% 24% 17% of Fund of Fund More than 10 of Fund Speed at Which Investor Can Decide on Co-Investment Size of Fund Previous Expression of Interest in Co-Investments LP Reliability No Requirements, Offered to All Investors LP Bite-Sized Requirements Fig. 13: Proportion of Investors in Most Recent Fund to Request Co-Investment Rights Fig. 14: Proportion of Investors in Most Recent Fund to Have Co-Investment Rights Included in LPAs 13% 5% 13% 24% 45% More than 8 29% 8% 3% 8% 13% 24% Preqin Ltd. /

7 Download the data pack: Preqin Special : Real Estate Co-Investments Investor Appetite for Co-Investments As shown in Fig. 15, investor appetite for real estate coinvestments has increased slightly over recent years; approximately a quarter of investors have stated they will target co-investments as of 2016, and a further 12% are considering co-investments although nearly two-thirds of the real estate investor population will not target co-investment opportunities. Investor Size Co-investments have high barriers to entry for institutional investors, including the requirement of larger capital commitments as well as the large administrative burden and substantial human resource required to carry out the due diligence and portfolio monitoring that accompany coinvestments. As a result, there is a clear correlation between investor appetite for co-investments and institutional investors assets under management (AUM): 8 of real estate investors holding less than $500mn in AUM will not co-invest, while the majority of those investors with $50bn or more will co-invest (Fig. 16). Investor Type Similarly, there are differences in appetite for co-investments among differing institutional investors. Typically, investors with larger investment teams, or those with large asset bases, demonstrate a greater propensity for co-investments. Sovereign wealth funds represent the largest proportion (62%) of investors that will invest through co-investments, followed by private wealth institutions (43%, wealth managers and family offi ces), asset managers (35%) and insurance companies (34%), as shown in Fig. 17. Fig. 15: Investor Appetite for Real Estate Co-Investments, Proportion of Investors Data Source: 22% 24% 2 27% 2 12% 13% 12% 67% 65% 62% 61% 62% Preqin s Real Estate Online contains information on more than 500 investors worldwide that co-invest or consider co-investing alongside fund managers. In-depth profi les feature full contact information for key decision makers, detailed information on future investment plans and more. For more information, please visit: Will Co-Invest Will Consider Co-Investing Wil Not Co- Invest Source: Preqin Real Estate Online /reo Fig. 16: Investor Appetite for Real Estate Co-Investments by Assets under Management Fig. 17: Investor Appetite for Real Estate Co-Investments by Type Proportion of Investors % 8 75% Less than $500mn $ mn 19% 13% 68% $1-9.9bn 38% 47% $ bn 54% 53% 13% 1 33% 31% $ bn $100bn or More Will Co-Invest Will Consider Co-Investing Wil Not Co- Invest Proportion of Investors % 23% 15% Sovereign Wealth Fund 43% 13% 44% Private Wealth 35% 34% 12% 1 53% 49% Asset Manager Insurance Company 19% 1 15% 12% % 74% 74% Public Pension Fund Foundation/ Endowment Plan Private Sector Pension Fund Will Co-Invest Will Consider Co-Investing Wil Not Co- Invest Assets under Management Source: Preqin Real Estate Online Investor Type Source: Preqin Real Estate Online 2016 Preqin Ltd. / 7

8 Preqin Special : Real Estate Co-Investments Download the data pack: Investor Co-Investment Activity Of more than 100 investors surveyed by Preqin in H2 2015, one-third had some interest in co-investments, perhaps illustrating the barriers to entry to some institutional investors that lack the internal resources to manage capital invested in these structures. For those that do make co-investments, the key motivation is gaining more exposure to attractive assets, which was mentioned by 44% of respondents (Fig. 18). A large proportion (42%) of surveyed investors also stated better returns as a perceived benefi t of co-investing, as well as the opportunity for lower fees than in the traditional commingled fund model. As shown in Fig. 19, of those real estate investors surveyed, 4 have seen their co-investments outperform their private real estate fund returns, including a fi fth that have signifi cantly better returns. While the majority of investors have seen better returns, one in 10 investors has seen their fund investments outperform their co-investments. Fig. 18: Investors Perceived Benefits of Co-Investing The results of our survey indicate that co-investments typically have lower fees than those seen in the usual fund arrangements (Fig. 20). The majority (58%) of fund managers offer coinvestment opportunities with a reduced management fee, with an additional 19% offering no management fee. A similar trend is seen for carried interest rates too. A quarter of fi rms charge no carry, whereas 44% offer a discounted carry structure to the standard fund commitment. More often than not, LPs are seeing reduced and more favourable fee arrangements on their co-investment commitments when compared to their fund commitments. Co-investments remain a tiny proportion of most investors portfolios however, with 62% having less than 2% of their real estate portfolio allocated to co-investments (Fig. 21). There are some investors that commit much more capital to coinvestments, with 13% allocating more than 1 of their real estate portfolios to such opportunities. Fig. 19: Investors Views on the Performance of Their Co-Investments Compared to Their Fund Investments Exposure to Attractive Assets Better Returns Reduced Fees 3 42% 44% 2 Significantly Better Returns from Co- Investments Slightly Better Returns from Co-Investments More Control over Investments Opportunity to Put More Capital to Work Strengthen Fund Manager Relationships Gain Knowledge of Industry Sector Other 8% 19% 25% 28% % 5% 5% 15% 2 Similar Returns from Co- Investments and Fund Investments Slightly Lower Returns from Co-Investments Significantly Lower Returns from Co- Investments Too Early to Tell Proportion of Respondents Source: Preqin Investor Survey, H Fig. 20: Discounts Offered to Co-Investing LPs Compared to Usual LP Fund Source: Preqin Investor Survey, H Fig. 21: Breakdown of Investors by Proportion of Real Estate Portfolio Allocated to Co-Investments % 58% 23% 24% 44% 32% 1 1 3% 62% Less than 2% 2-5% More than 2 No Fee Reduced Fee Same Fee No Carry Reduced Carry Same Carry Management Fee Carried Interest Source: Preqin Investor Survey, H Preqin Ltd. /

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10 Preqin Special : Real Estate Co-Investment Outlook March 2016 Preqin: Global Data and Intelligence If you want any further information, or would like a demo of our products, please contact us: With global coverage and detailed information on all aspects of the real estate asset class, Preqin s industry-leading Real Estate Online service keeps you up-to-date on all the latest developments in the real estate universe. Source new investors for funds and co-investments Find the most relevant investors, with access to detailed profi les for over 5,100 institutional investors actively investing in real estate, including insurance companies, pension funds, family offi ces, foundations, wealth managers, endowments, banks and more. Identify potential investment opportunities View in-depth profi les for over 5,500 unlisted real estate funds encompassing all strategies, including core, core-plus, value added, opportunistic, debt and distressed, and fund of funds. Find active fund managers in real estate Search for fi rms actively targeting real estate investments and how much dry powder they have available to put to work, with detailed profi les on over 3,200 fund managers from around the world, including background, key contacts and funds raised. Analyze the latest real estate fundraising activity See which fund managers are currently on the road raising a private equity real estate fund and which will be coming to market soon. Analyze fundraising over time by fund strategy, property type and location. Benchmark performance Identify which fund managers have the best track records, with performance benchmarks for real estate funds and performance details for over 1,400 individual named funds. Examine fund terms Use our unique Fund Terms Calculator to model fee changes and see: what are the typical terms that a real estate fund charges? What are the implications of making changes to different fees? How do these fees vary between fund type and strategy? Find out how Preqin s real estate products and services can help you: /realestate New York: One Grand Central Place 60 E 42nd Street Suite 630, New York NY Tel: Fax: London: 3rd Floor Vintners Place 68 Upper Thames Street London EC4V 3BJ Tel: +44 (0) Fax: +44 (0) Singapore: One Finlayson Green, #11-02 Singapore Tel: Fax: San Francisco: One Embarcadero Center Suite 2850 San Francisco CA Tel: Fax: Hong Kong: Level 9, Central Building 1-3 Pedder Street Central, Hong Kong Tel: Fax: Manila Pascor Drive Sto. Niño Parañaque City Metro Manila 1700 Philippines info@preqin.com Web: 2015 Preqin Ltd. /