Last week, Private Equity Analyst Assistant Managing Editor Laura Kreutzer chatted with Mercury Capital Advisors Managing Partner Alan Pardee and HarbourVest Partners Principal Ryan Gunther about the year ahead in fundraising.

In this clip, the two talk about potential doomsday scenarios for private equity firms looking to raise new capital in 2015. – The wall street journal
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Five Point Capital Partners LLC (“Five Point”), a private equity firm focused on investments in the midstream energy infrastructure sector, today announced the final closing of Five Point Capital Midstream Fund I and II L.P. (the “Fund”). Total equity commitments to the Fund were in excess of $450 million, exceeding its fundraising target of $400 million. The Fund received strong support from a diversified base of investors, including leading public pension funds, pre-eminent university endowments and foundations, multi-national corporations, insurance companies, fund-of-funds, and family offices.

The Fund will focus on investments in the midstream energy infrastructure sector and seek to partner with exceptional management teams to build world class businesses. Led by partners David Capobianco and Matthew Morrow, the Five Point team has extensive industry and financial expertise, including more than 100 years of collective experience investing in and operating midstream companies. To date, the Fund has made a highly successful investment in Twin Eagle Resource Management, a midstream energy infrastructure and energy marketing business, and backed a talented management team to form Redwood Midstream, a multi-phase oil, gas, and liquids gathering and processing business.

David Capobianco, Managing Partner of Five Point, said, “We are pleased with the Fund’s reception and would like to thank our limited partners for their support. Five Point has a demonstrated record of success in identifying industry inflection points early, creating and investing within proprietary investment themes, and building value through operational expertise. We see extraordinary opportunities in the current midstream energy market, and believe that the combination of near-to-intermediate term dislocation and long term growth will create a superior climate for our focused investment strategies. We are well positioned to execute on our investment approach, which we believe protects the downside while maintaining asymmetric upside in the midstream companies we build.” – Chris Witkowsky

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Core real estate will struggle for attention this year, as consultants and fund managers say investor assets – and long-term returns – are more likely to flow to funds plying niche sectors, such as opportunistic, debt, distressed, and overseas properties.

The tilt toward risk was evident last year, but is likely to accelerate in 2015, says Jacques Gordon, global head of research and strategy at LaSalle Investment Management, which has $53 billion in real estate assets.

“2014 was another terrific year for private equity real estate, with continued low economic growth, low interest rates, and low inflation,” he says. “But we know the end of this era of low-low-low is getting nearer.”

Institutional investors, consultants, and fund managers have been moving “up the risk curve” in anticipation, he says. Signs of this cropped up last year, when Preqin data showed opportunistic and Europe-focused strategies were attracting capital, as reported.

“There was really widespread interest in taking on more risk last year,” Gordon adds. “People who have made a lot of money in property are willing … to go into some of the riskier markets.”

Core investing opportunities have gotten extremely thin in terms of properties that are fully leased, need little capital investment, and have long-term income prospects, says Christian Busken, director of real assets at Fund Evaluation Group (FEG), an investment consultant.

“We’re not recommending core real estate for 2015 because we believe the market has become fully valued,” he says. “It has become more or less a fixed income type of investment the last couple of years.”

U.S. institutional investors are expressing a greater appetite for risk in various ways, says Alan Pardee, managing partner at Mercury Capital Advisors, a placement agent. “They’re looking now at funds investing in secondary and tertiary markets,” he says. “They’re looking at credit and debt investments. They’re looking at Europe.”

Real estate managers have been widening their product lineups to meet this demand, launching funds that target specific geographic regions, investment themes, or property segments, as reported.

However, investors are getting choosier in their selection of fund managers, Pardee says. “Even [managers] that have strong teams can end up with tough fundraises,” he says. “It’s a discerning market. Investors want strategies that are replicable and have an attractive [deals] opportunity set.”

The spoils are going to managers that have compelling investment ideas and the right credentials, he adds, citing a recent fund that squarely targeted buying, building, and improvement of parking facilities in China. “You couldn’t get more niche than that,” Pardee says. “And it was oversubscribed.”

Private real estate fund managers already had a solid 2014, having hauled in $90 billion in assets in globally, according to preliminary year-end totals from Preqin. That’s just shy of 2013’s $92 billion, though last year’s tally is likely to increase after stragglers report their totals.

Managers are likely to continue on that pace this year with funds favoring risk, such as opportunistic or value-add strategies that include real estate development or properties seeking new tenants, LaSalle’s Gordon says. “Today, properties that are leased and stabilized are getting single digit returns, 5% real returns, so to double those, you’ve got to do something with the property,” he says.

FEG is recommending that its institutional investor clients look in secondary markets for opportunistic or distressed deals in the U.S. and Europe, Busken says.

Some managers are already reaping the benefits of this turn to risk, including Ares Management, an $80 billion private equity manager that recently closed its eighth U.S. real estate fund – a multi-sector value-add strategy – with $824 million, topping its $750 million target.

Managers are also getting traction with funds investing in foreign markets, Pardee says. “There continues to be attention on Asia as a place to put capital,” he says. “Greater China is still of interest. There is still a desire to put capital there even though there is talk of a slowdown.”

Investors are also targeting Europe, and not just for distressed deals, with some funds aiming for opportunistic assets, Gordon says. “Some of the money that never wanted to look at Europe, because it had a weak story demographically, is now looking there for higher-return investing,” he says. “I’d say the sophisticated money is very country-specific and region-specific, right down to the mandate or the product.”

Ares also recently closed its fourth European real estate fund with $1.3 billion, topping its $1 billion target, with a range of residential, retail, office, and industrial properties in its sights.

Real estate debt is also hot, with a sound showing in 2014, raising $20 billion globally, compared to $16 billion in 2013, according to Preqin.

“Pensions are going into the offices of private equity firms and saying… ‘How can you get me excess yield, better than the basis points I’ve been seeing from fixed income?’” Pardee says. “You have to access the credit markets across the world, find ways to access different parts of the capital structure. We’re seeing more and more real estate debt activity from different people.”

Various firms have been active on the real estate debt front. Earlier this week, Harvard University’s endowment reportedly committed “several million dollars” to AlumCreek Holdings, a new private equity fund targeting distressed and standard commercial mortgage debt, as reported. And KKR reportedly is launching a new debt arm within its real estate unit by hiring a team from Rialto Capital Management, according to the Wall Street Journal.

Distressed investing deals may be harder to find this year, especially with banks in Europe finally repairing their balance sheets, but they are still available in certain markets, Gordon says. “In China, we’re in early days on distressed,” he says. “We understand those kinds of plays have just about run their course in Spain, but now the focus is on Italy.”

Still, Siguler Guff & Co., a $10 billion multi-strategy private equity manager, announced this week it had closed its second distressed real estate multi-manager fund at $877 million, topping its $750 million target, with expectations that it will see even more such deals in Europe’s commercial property sector.

Another area that might get more attention this year is residential single-family housing, via a niche for land deals and development opportunities, rather than housing as a distressed play, Pardee says.

That’s the premise behind RAM Real Estate Capital, which recently launched with a $200 million co-investment fund aimed at capital and equity lending to homebuilders and residential developers, says Rodney Montag, the firm’s CEO and a homebuilders’ market veteran. RAM is underwriting deals in the Southeast, Texas, and the East Coast, and expects to pursue more institutional investor capital in the future.

“The housing market is still at the very early stages of recovery,” Montag says. “It’s taken longer than everybody expected, but we think a longer, smoother recovery is a good thing for investors like us. We’re nowhere close to getting to the historical average number of permits, forget the peak. The housing market has a long way to go.” – Tom Stabile

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Mercury Capital Advisors Group have perfected flat management within the company, creating a team where everyone takes responsibility for their actions and strives to exceed expectations. The CFI.co Judging Panel felt that through an emphasis on teamwork, Mercury Capital Advisors Group have been able to leverage the nearly three centuries of combined experience to deliver an impressive track record.

The company has effectively used both internal and external feedback to foster and develop skills, entrepreneurial spirit, and maintain strong relationships and understanding with all stakeholders.

Mercury Capital Advisors Group has created an extended family that makes for a winning approach when it comes to the globalised world of fundraising, ensuring that clients enjoy excellent access to institutional investors across the world.

With an unwavering belief in teamwork, Mercury Capital Advisors Group has amply demonstrated that the power of the group – and the highly effective use of its collective knowledge and experience – makes for a winning approach. It gives the CFI.co Judges particular pleasure to recognise Mercury Capital Advisors Group as the Best Fund Raising Team Global 2014.

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“Alan Pardee quoted in the WSJ”

More private equity professionals may launch their own firms in the coming year as investors look for attractive places to commit their money amid stiff competition for allocations with established managers, according to various industry participants.

“There’s a lot more comfort with spinout groups and first-time funds than at any point that I can recall [since the financial crisis],” said Tim O’Gara, founder of Chicago placement agent Shannon Advisors, which in 2014 helped raise a $272 million debut institutional fund for lower midmarket buyout firm Tower Arch Capital.

Lack of succession planning at some established firms, an improvement in exits that has allowed midtier professionals to show track records, and challenges securing allocations with veteran fund managers have all created a more receptive environment for newer groups. However, many newer groups will still face formidable challenges raising capital in an environment where more investors want to write bigger checks with fewer funds.

As institutional investors find allocations with the established top-performing shops tougher to come by, some of them may be more willing to support a new team, particularly one that has worked together within an older, larger firm.

“As investors get shut out of certain funds or don’t get the full allocation they were looking for, [they] will say, ‘If I couldn’t get into that fund, who has a similar strategy?’” said John Morris, managing director at HarbourVest Partners. – Laura Kreutzer

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