JLL: Record Dry Powder; Sourcing Deals a Challenge
JLL, Chicago, said private equity real estate fundraising started 2019 strong, registering the highest fundraising figure since the Great Recession.
“There is plenty of dry powder in the market, and plenty of competition for the best opportunities,” JLL’s Record Dry Powder, Fund Managers Continue to Raise Capital report said.
Private equity funds rose $39 billion in the first quarter, in line with the $38.4 billion they raised in early 2008.
Sourcing deals to invest that dry powder in remains challenging, said JLL Asia-Pacific Head of Funds Advisory Martijn van Eldik. “Current pricing and competition make it harder for managers to deploy capital or justify the strategies they are undertaking,” he said.
In this environment, traditional risk and return classifications can change as core investors move up the risk curve to meet return targets, the report said. Much of the first quarter allocation was at the riskier end of the investment spectrum; value-added strategies grew by nine percent and opportunistic strategies increased 22 percent during the period.
Investors are also taking more risk by branching out into emerging sectors or niche markets to find returns, van Eldik said. “Fund managers who are already in the alternative space are gearing up to provide a range of solutions from co-mingled funds, co-investments, separate accounts and programmatic joint ventures in order to tap into that demand,” he said.
The largest funds are attracting the most capital at the moment, JLL reported. Citing PERE data, the report said the ten largest funds to close in the first quarter collectively raised $36 billion of investor capital.
“We are seeing a lot of investors consolidating their portfolios and reducing the number of managers they work with. They tend to go with the bigger brands with top quartile performance. The big get bigger, basically,” van Eldik said, noting the largest funds can offer investors greater incentives than smaller funds. Larger funds also generally have wider investor bases, he noted.
Larger, more sophisticated investors are increasingly pursuing direct investments and separate accounts over comingled funds, which means that fundraising may potentially take longer going forward. It may also take longer to reach targets as investors make smaller commitments to funds, van Eldik said.
But smaller fund managers with strong track records in certain sectors or in emerging markets are also seeing good capital fundraising, JLL said.