Investors Turn to Big Real-Estate Funds

Updated April 21, 2015 4:54 p.m. ET

Investors are pouring more money into real-estate funds than they have since the property bust, but
a few giant fund firms are collecting the lion's share of the spoils.
Pension funds, endowments and other big institutional investors are putting more cash into privateequity firms with large real-estate funds and strong track records, leaving smaller firms to fight over
the scraps.
"That expression 'A rising tide lifts all boats'--that's not the case here," said David Hodes, managing
partner of real estate consultant Hodes Weill Associates.
Investors are putting more money into real estate in search of better returns than they can get from
bonds. At the same time, some investors are reducing the number of funds they hold, helping
improve their bargaining power on fees.
"Many investors found that adding new funds and new strategies did not ultimately improve
performance, and might have gone the other way because it was a significant drain on resources,"
Mr. Hodes said.
Overall, 210 global closed-end funds raised a postcrash record $97.7 billion in 2014, up from $95.5
billion in 2013 and $46.8 billion at the bottom in 2010, according to data tracker Preqin. Funds
pulled in a record $137.5 billion in 2008.
But most of the new haul is going to big funds. Overall, funds of more than $1 billion have accounted
for 64% of all the capital raised so far this year, more than twice the 31% they accounted for in
2012, according to Preqin.
Big firms' success reflects their relatively strong performance during the downturn, when many
other funds, particularly those run by big U.S. banks, such as Lehman Brothers Holdings Inc.,
Morgan Stanley MS 0.65 % and Goldman Sachs Group Inc., GS 0.60 % performed poorly.
Blackstone Group BX 0.37 % LP, the industry's fundraising leader, earlier this month reported
annualized returns of 18% after fees for its real-estate funds launched since 1992, not including the
one that just closed. The New York firm raised $14.5 billion for its most recent fund, surpassing its
target.
Starwood Capital Group recently raised $5.6 billion, ahead of its goal. Lone Star Funds this week
closed on its latest fund, raising $5.5 billion, $500 million more than targeted, according to people
familiar with the matter.
With the bigger war chests, the funds have gone property hunting. Notable recent deals include
Blackstone's purchase of the Willis Tower in Chicago; Starwood's acquisition of a stake in the Sol
Principe hotel in Malaga, Spain; and Lone Star's purchase of the Jurys Inn hotel chain, based in
Ireland.
By contrast, midsize funds between $500 million and $1 billion accounted for 17% of the total capital

raised so far this year, down from 29% in 2012, according to Preqin.
Another measure shows a similar pattern. Global funds that have raised more than $1 billion since
the beginning of 2014 hit 109% of their targets in an average of 14 months. Smaller funds took 20
months and hit only 97% of their targets, Preqin said.
For U.S.-focused funds, the difference was even more dramatic. Funds over $1 billion hit 113% of
their goals, while funds of less than $1 billion hit only 96% of their targets, Preqin said.
Some smaller, niche funds that specialize in certain types of property or geographies are doing well.
Such funds raised $18 billion in 2013 and the same amount in 2014, compared with $11 billion in
2011 and $12 billion in 2012, Preqin said.
Kayne Anderson Real Estate Advisors of Boca Raton, Fla., is expected to close soon on a $1 billion
fund focusing on medical office buildings, student housing and senior housing, while Chicago-based
LaSalle Investment Management JLL 1.24 % has hit its targets on three funds in the $300 million to
$400 million range focused on the Japanese logistics industry.
"The ones that are successful are either the very big guys or smaller funds," said Andrew Moylan,
head of real-estate funds for Preqin. "If you're just trying to say, 'We're trying to raise $500 million
for a pan-U.S. diversified fund,' it's very difficult."
The trend in real estate fundraising differs from the broader private equity world, a reflection of how
severe real estate losses were after the bust. The major players in private equity haven't changed
much. According to Dealogic, the same firms were in the top five in terms of total global deal value
in 2007 and 2014: KKR KKR 0.56 % Co., Blackstone, Carlyle Group CG 0.47 % LP, TPG Capital LP
and Goldman Sachs Capital Partners.
But in the real-estate business, the cast of characters has changed. Many of the firms that used to be
the top players have either failed haven't raised commingled equity funds since the downturn, such
as Goldman's Whitehall Funds.
Big-name private-equity firms that launched real estate businesses after the bust, like KKR and TPG,
and can't point to a long-term track record, have had to tailor their fundraising strategies to the
tough climate. KKR was able to close its first post-crash fund late 2013--to the tune of $1.5 billion-after committing $500 million of its own capital, an unusually large amount. TPG began raising its
first real-estate fund early last year--with a target of $1.5 billion to $2 billion--and hasn't closed it,
although it has raised more than $1 billion, according to people familiar with the matter.
Meanwhile, some established private-equity players before the crash have scaled back their
fundraising. For example, Philadelphia-based Lubert-Adler just closed its first new commingled fund
since the downturn, raising $575 million. Its last fund before that, which closed in 2007, was $2
billion.
Dean Adler, the firm's chief executive, said it set its fundraising sights lower because its focusing
these days on redevelopment deals in the $25 million to $100 million range that require a lot of
execution skills.
"You have to size your fund to the opportunities you're pursuing," he said.
Write to Peter Grant at peter.grant@wsj.com

Corrections Amplifications:
Blackstone Group LP reported annualized returns of 18% after fees for its real-estate funds launched
since 1992. An earlier version of this article incorrectly stated a 1994 launch date. (April 21, 2015)
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