First-Time Funds Face Daunting Market

Bell Partners, Northern California, Bay Area, Bell Institutional Fund VI, Pennsylvania Public School Employees’ Retirement System

By Neil Gonzales

Raising capital for real estate investment has become ultra competitive with the number of funds continuing to proliferate over recent years. For first-time fund seekers, the current capital-raising market is especially tough.

Plan Bay Area, Communities for a Better Environment, Earthjustice, Sierra Club, Association of Bay Area Governments, Metropolitan Transportation CommissionFirst-time fundraisers also have to contend with the fact that investor capital is increasingly flowing into vehicles raised by more experienced managers.

“It’s very challenging,” said Douglas Abbey, chairman of Swift Real Estate Partners, an investment firm based in San Francisco. “You have a lot of entrants in a crowded field.”

Still, Abbey said, first-time managers can break through if they understand the advantages and disadvantages of the industries for which they seek investors and can distinguish their project from those of other fundraisers.

According to a report this month by research firm Preqin Ltd., the market is flooded with 473 real-estate vehicles seeking capital— similar to the high numbers of funds for the same period in 2012 and 2013 and a marked increase from the 410 in May 2010. The 473 funds are seeking to raise $170 billion—“the largest amount of capital seen since 2009,” the report said.

“The high competition in the real-estate fundraising market makes it vital for fund managers and placement agents to ensure that their funds are being seen by proactive investors and that no mistakes are made with initial fund communication,” the report also said.

Just 7 percent of capital raised in 2013 was by first-time managers—a decline from the 18 percent in 2011, according to an April report by Preqin, which focuses on alternative assets such as real estate, hedge funds and private equity. On the other hand, managers that have previously launched four or more funds represented 63 percent of the capital raised in 2013 compared to 51 percent in 2011.

A key requirement in breaking into the fundraising world is being well aware of the benefits and drawbacks of a particular industry when it comes to raising capital. For example, there’s less competition in the affordable-housing business than the West Coast value-add office industry, Abbey said.

But affordable housing is very complicated in its regulatory, financing and other issues, he said. “The complexity of the affordability-housing business is so challenging.”

While affordable housing is seen as a niche market for investors, the office industry is more familiar and tangible to most people. However, competition is fierce in the office market. Fund seekers will be competing with the likes of Shorenstein and other well-established real-estate firms, Abbey said.

That’s why “having a sellable strategy and something that differentiates you is important,” Abbey said during last week’s informal session at Swift’s headquarters that focused on raising a first-time fund. The session, part of the Brown Bag Lunch series organized by the San Francisco chapter of the Urban Land Institute, covered the fundraising process, motivation for the fund sponsor and other topics.

In their pitch, fundraisers should also tell potential investors how their capital will “work in the real world” and generate returns, Abbey said. Other conditions for success include teaming up with talented people and showing the ability to close business deals.

Patience and persistence are needed, too. It takes 18 months on average to launch the initial fund, Abbey said.

Once that fund is established, he said, “the key is to not screw up the first deal” because investors will likely return if they see good performance with the initial fund.

Speaking with about 25 ULI members in a small conference room, Abbey also offered his own experience setting up a first-time fund as an example of overcoming the odds.

Abbey, considered an elder statesman of the Bay Area commercial property world, teamed up with Swift founder Christopher Peatross, who has an impressive track record in the arena of real-estate investment trusts and private equity.

“Chris was talking about raising a fund,” Abbey said. “It would’ve been challenging” for him to raise an institutional fund on his own despite his distinguished business background.

So the two combined their respective skills and established Swift’s first private real-estate fund in pursuit of up to about $300 million in equity commitments from investors such as high net-worth individuals, pension funds and foundations. The fund is targeting value-add opportunities in West Coast offices and industrial buildings.

Regardless of how competitive the fundraising market is, Abbey said a good real-estate operator in the end “should be able to attract capital.”