KEY TAKEAWAYS
- There is a strong appetite for distressed acquisitions among equity investors, but they expect more than just returns.
- Smaller funds may be best off returning to established partners rather than reaching out to new investors.
- Fund managers and general partners can offer more personalized or more attractive terms to bring in new capital.
While the pandemic has wiped out value in some sectors of real estate, many investors have been stockpiling capital for years in preparation for the next downturn, and now there is no shortage of dry powder ready to be deployed into the market. Early tabulations suggest that there may be hundreds of billions of dollars poised to go after distressed assets in real estate.
“How will you shine in a difficult environment for fundraising? Maybe it’s technology, reporting, transparency and your commitment to LPs or a focus on social impact. Those long-term relationships are what matter,” says RSM US Partner and Real Estate Senior Analyst Laura Dietzel.
Though many investors have had their values affected by the coronavirus, there is an appetite for purchases. In a Bisnow survey, 90% of respondents reported that they would be willing to make an acquisition if it made financial sense.
Much of that money is likely to be shuttled into megafunds operated by a handful of global investment managers. In a time when returns are uncertain, investors will likely look for track record, speed and size when choosing where to park their capital.
That doesn’t mean that smaller and midsized funds won’t be able to raise capital, but they may have more luck raising equity with existing investors with whom they have a history of competitive returns.
“Any time we feel anxious, we go back to what we know,” Dietzel said. “Funds are going to have the most success with their current investor base, and are more likely to be able to raise capital if they’ve done well in the past.”
Smaller funds can also differentiate themselves by taking on specific goals with their investments, like social justice impact, climate action, or ESG—environmental, social and corporate governance. In the current political climate, Dietzel said, investors may have more of an appetite for investments that they know are helping to rebuild underserved communities.
Having hands-on, communicative general partners can also set smaller shops apart. In distressed investing, there are likely to be some assets that don’t perform as well. Being transparent and communicative about those setbacks can earn investor trust and make raising equity even easier in the future, Dietzel said.
At the outset of the pandemic, new investors were hesitant to make financial moves without having met in person, according to Cross Lake Partners Vice President of Investor Relations Gloria Viniar. But most have now adapted to the new normal, she said, which has opened the doors to holding virtual meetings and webinars to raise equity capital.
Tipping point: Middle market funds can bring in more equity by offering more favorable terms to LPs, but may be better off just sticking with investors who trust them.
