Download Performance of Private Equity Real Estate Funds

Performance of Private Equity
Real Estate Funds
Ilkka Tomperi
ERES 2009 – Stockholm
25 June 2009
Session 1D – Investment and Finance
Study
• The study investigates the performance of private equity
real estate funds.
• Private equity real estate funds are non-listed closedended limited partnerships.
• Investors are typically institutional investors including
pension funds and insurance companies.
• Funds are managed by general partners (sponsor) who
are either large real estate or private equity companies
or more entrepreneurial boutiques.
• We use a global sample of value added and
opportunistic private real estate funds to study the fund
and sponsor related factors’ correlation with fund
performance.
Private Equity Real Estate Funds
• Similar structures than traditional private equity funds
(buy-out or venture capital).
• Market has experienced a period of rapid growth both
based on capital commitments and number of funds
raised.
• INREV data shows the total amount raised in Europe to
exceed €54 billion in 2005-2008.
• Preqin data shows the total global fund raising to exceed
$349 billion in 2005-2008.
Private Equity Real Estate Funds
Total Commitments Raised by Private Equity Real
Estate Funds Globally in 2000-2008
Source: Preqin
Private Equity Real Estate Funds
Average Fund Size per Closing Year of
Closed in 2000-2008
Source: Sample of this study
Funds
Background
• Kaplan & Schoar (2005): private equity returns are
positively linked to both size and sequence number of the
fund; show evidence of persistence in realised returns
• Phalippou & Zollo (2005): private equity performance covaries postively with both business cycles and stock
markets
• Hahn et al. (2005): showed that past funds‘ performance
is linked to future real estate funds‘ performance; used
only performance data but excluded other factors and size
Data
• A sample of 896 funds from 1980-2009.
• Sourced from Preqin database and authors‘ own
database to enable as large as possible data set.
• Performance measured with IRR and money multiple
(TVPI = total value to paid-in capital).
• Where performance is used, sample is limited to funds
with DPI>80% (DPI = distributed to paid-in capital) to
guarantee reliability.
• Fund size and target size as well as fund managers‘ year
of establishment, name of the fund, sequence number of
the fund, fund vintage and geography are collected
where available.
• Market data includes US GDP growth, US inflation (CPI),
US direct property returns (NCREIF) because
remarkable share of funds in the sample are either US
focused or global (with US allocation).
Data
Source: Sample of this study
Five Models
Performance
•
Size and Sequence Number
•
Persistence of Performance
•
Factors Affecting the Performance
Size
4. Factors behind the Fund Size
5. Growth Drivers
1. Fund Retuns: Size and Sequence
• Fund size has a positive linkage to the realised returns.
• Sequence number is negatively correlated to IRR unlike
previously reported with a sample of private equity funds
but supporting the case for emerging managers.
2. Fund Retuns: Persistence of Returns
• We evaluate the persistence in
fund returns to see if historical
returns can be a guide for future
success.
• The results show that past
performance is an indicator of
future success in private equity
real estate while growth in fund
size has a negative linkage to
IRR.
• Positive link between fund size
may be an indication of
established managers but also a
result of the sample requiring at
least two funds to be raised.
3. Fund Retuns: Factors
• Regressing the key quantifiable factors possibly
connected to the fund performance and both fund related
characteristics and market factors shows that funds
raised during periods of low GDP growth are likelier to
perform better.
• We also show, unsurprisingly, the positive linkage
between underlying direct real estate market
performance during the fund life but also confirm a
significantly positive correlation between inflation during
the fund life and subsequently realised returns.
3. Fund Retuns: Factors ...cont‘d
4. Size: Factors
• Larger funds typically have larger sequence numbers
providing support to the fact that only well performing
managers are able to continue in the business and raise
multiple follow-on funds.
• The realised returns from the predecessor funds support
the increase in the fund size and non-US focused funds
are larger possibly because a wider range of target
markets.
• Smaller funds are raised during periods of high GDP
growth possibly linked to the fact that these periods
attract new players to enter the fundraising market.
4. Size: Factors ...cont‘d
5. Size: Growth in Fund Size
• The growth rate
declines along the
increase in sequence
number.
• Stronger growth is
supported by good track
record (higher realised
IRR of the predecessor
fund) and booming
property markets during
the fundraising year.
The Case for Emerging Managers
Average and Median (dark and light) Fund Size
and IRR by Sequence Number
Source: Sample of this study
Conclusions
• Emerging managers and earlier funds are shown to have
higher returns and realised returns of past funds are
shown to be a reliable indicator of future success.
• Managers should not focus on growing assets under
management (fund size) but on quality investments.
• Investors should pay a lot attention on the performance
of past investments in their due diligence while choosing
new funds to their portfolios.
• Market timing is of certain importance and funds raised
during non-booming years are likelier to perform better
and underlying market returns (beta) are an important
contributor even to value-added and opportunistic
property funds’ returns.
Conclusions
• More detailed research would be needed in order to
differentiate the true alpha generated by private equity
real estate funds and to show that the good returns are
not just compensation for the illiquid nature of the
investments or market returns ballooned via the use of
leverage as some previous studies on buy-out matkets .
• In order to use more reliable indicators on the investment
environment, one should consider using more focused
regional or global GDP and inflation data and consider
replacing the NPI index with regional IPD indices where
available.