May 19, 2014
Interviewed by: Privcap
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Fundraising World Tour: Which LPs Are Open For Business?

Fundraising is back with the capital raising market ‘healthy’ and becoming more ‘robust’, according to Mercury Capital Advisors’ managing partner Alan Pardee. He takes PrivcapRE on a world tour of LPs open for business.

Fundraising is back with the capital raising market ‘healthy’ and becoming more ‘robust’, according to Mercury Capital Advisors’ managing partner Alan Pardee. He takes PrivcapRE on a world tour of LPs open for business.

Fundraising World Tour: Which LPs Are Open for Business

With Alan Pardee of Mercury Capital Advisors

Zoe Hughes, PrivcapRE:

I’m joined by Alan Pardee, managing partner at Mercury Capital Advisors. Thank you so much for joining me, Alan.

Alan Pardee, Mercury Capital Advisors:

Thank you for inviting me to come today. I appreciate it.

Hughes: Fundraising is certainly not a business for the faint of heart, especially over the past couple of years. But I’d love to get a sense of how the market is currently. How would you characterize fundraising for commercial real estate over the past year?

Pardee: The good news, for anybody trying to raise a fund today, is that our market is back. It’s actually approaching healthy. I hesitate to say the word, but I will say that it’s becoming robust. That doesn’t mean that everything going into the market will have a successful outcome. It is still a choppy environment.

Limited partners have lost a fair amount of capital recently. The downturn was harsh for many people. But, with the right story and the right strategy, there are limited partners who are capitalized, who are embracing risk again, investing in funds, and, most importantly, investing in funds, deals, and joint ventures. They are open for business at the moment.

Hughes: What are your expectations looking out over the next 12 months?

Pardee: I think we’ll see more of the same. Barring the central banks of the world, stomping on the brakes all at the same time, we’re going to find ourselves in a continuingly favorable environment. I don’t think we’ll see dramatic shifts upward or downward, unless something in the macro changes significantly.

Hughes: Do you get the sense that real estate allocations from the LPs are actually increasing?

Pardee: That’s a different question. I don’t think these specific allocations have changed drastically; simply, the overall asset pool has expanded. So, if somebody had to make up a number, an 8% allocation to real estate for the simple reason that the asset pool has grown over the last several years, there’s a bit more money to invest. But simply having access to more capital is not what makes for bravery. The fact is that seeing checks in the mail (or wires in today’s world), being able to go to your boss and say, “I’ve got three checks in mind—this stuff still works” has changed the level of conviction of limited partners so that there is a heightened willingness to invest today. That bravery I spoke of is real today.

Hughes: What’s your sense in terms of distributions over the last year? We’ve had some conversations with some people saying it actually was not as well as expected.

Pardee: Expectations were definitely a bit overdone. Surely, realizations have come back into people’s hands: did they see you as limited partners? Were you what they were hoping for when the world started to return to something akin to normal? No, they didn’t end up with the entirety of prior funds that were wounded coming back with sizeable realizations replacing all the capital that was lost. That did not happen.

But, certainly, with cap rates where they are and the financing market where it is, the ability to create a realization is real. Investors have seen a return of capital and, more importantly, returns on capital that put them in a better mood.

Hughes: I want to get a sense from you of who’s active in the market. It’s almost like a world tour.

Pardee: Certainly.

Hughes: Let’s look at the U.S. Who’s active in the market? Who’s not active?

Pardee: Sitting here now, in early 2014, in comparison to where we were in 2010, when the market was fairly close to being closed, you have most market participants back. Pension funds, effectively, were the entire market at the downturn. But, they are still a sizeable force in today’s market—the public pension plans, particularly. Corporate pension plans are smaller today in their relative share of the market than they were in, say, 2006. Fewer of them are active and available to invest. But the state plans are very busy and active. Some are with smaller programs than they might have had at the top of the market, but most are active nonetheless.

Some have decided that joint ventures or separate accounts are more to their liking than opportunity funds, for example, or other fund formats. But all are busy in some level. Endowments and foundations were, essentially, missing in action for most of 2010 and 2011. They came back into the market as the liquidity started to improve and they have been busy in 2012, 2013 and now, into early 2014, so that’s been good news.

Hughes: What’s their preference in terms of the vehicle choice? Because, obviously, they were very big in the comingled funds, but we have seen the likes of Harvard going much more direct. Where’s the appetite for them?

Pardee: For endowments and foundations, you see a bit of everything. Many investors, not just the endowments and foundations, at the bottom, started to say things along the lines of “the fund model was broken.” For them, that essentially meant they were going to be replacing the fund manager themselves by being active, direct investors. That worked for a while and continues to work for some. But, in reality, it’s a big world out there. Not every endowment, foundation, pension plan, or insurance company can behave in the same way a fund manager can in every geography. So, at some point, hiring someone to do that next level of investing becomes important.

Hughes: Who have been the new players in terms of the U.S. market? Widen that out to North America, as well.

Pardee: There aren’t too many new players in the U.S. There are some that have found that they didn’t have three or four years ago, so it feels like they’ve returned to health after a long pause. If you go up into Canada, we have some newer names that are active there.

The western Canadians have been far busier than we’ve seen them ever. I assume that has to do with the commodity price that is relevant in that part of the country. If I went name by name through the U.S., there are a few new parties, some new family groups that have become very busy. A couple of endowments have become significant; a few entities have merged together. But it’s not as though there are whole new classes of investors within the U.S. It’s just the better news—in the U.S. and in Canada, there’s money again. The economies are better here, so there’s the ability to invest.

Hughes: Let’s look at Europe. What’s the reality on the ground there?

Pardee: From an LP perspective, in terms of having capital and investing it, the LPs spent most of the last few years investing away from Europe; the European opportunities were somewhat scary to them. Some investors, globally, were not sure what kind of currency they were actually going to be holding after the disintegration of the Euro. Those fears are gone. The European investor is willing to invest in Europe again. In their local markets, they kept doing that, even at the bottom, but elsewhere within Europe. They have been investing in great size outside Europe. The fact that European investors have been very active in Asia was an important trend over the last three or four years. It continued last year, and will continue into 2014.

Hughes: Talk to me about new active players in Europe.

Pardee: Overall, we’ve seen a lot of activity through that region. The Danes have been particularly busy of late. We’re raising a fund right now that I can’t name, but it’ll close in the next several weeks. A veritable club of Denmark will have been a part of building what will have been a good-sized fund outcome oversubscribed.

We’ve seen a fair amount coming from Sweden. Less so from Finland, but Finland is definitely back. A fair number of investors have returned. Everyone wants to go to Norway and spend time with Norges Bank. The reality is they are more active as a direct investor than as a fund investor. They have capital and people have been reading the press and want to spend time.

Away from Scandinavia, you have the return of a number of investors. The Dutch have been active from bottom through the present. They were probably most active at the very bottom, almost rubbing their hands with the light at the multigenerational lows at which they could invest. Today, where things are now, in terms of the cap rate compression taking place, they’re active but not as active as they were at the very bottom.

The UK—enough entities are healthy that they’re active. The German insurance companies have returned, not quite in the same size or number as they were, but there’s enough to feel a presence there. The Swiss are busy. The French, less so. But, of course, the French economy is still in recovery mode. There’s almost nothing in the very southern tier of Europe.

Hughes: Let’s look at Asia, because I know you have raised capital for GAW Capital. What’s it like there? There have been a lot of conversations about Asian money looking at the U.S. What’s the appetite among the LPs, just for general investments?

Pardee: From the bottom to the present, Asia has been the major zone of capital in the world. LPs there have been active, busy funding opportunities here in the U.S. and elsewhere. It’s almost been the replacement to the U.S. when the U.S. was quiet in, say, 2010 and 2011, and in the beginning of 2012.

Now that everywhere seems to be healthier, they’re not quite as big a piece of the pie as they once were. That said, there is still plenty of activity, ranging from the large Chinese sovereign wealth funds, to the various Korean institutions that are quite active, to the Hong Kong families, and some institutional actors there. The Singaporeans are also quite busy.

The Japanese have been very busy and active in ways I would not have expected this soon after the issues in their economy, and, of course, the issues with Fukushima. The Japanese economy is back. The investors there are active. They’re not as active as they were at the peak, in 2006 and ’07. You had people writing $400 million checks to blind pool funds. That’s not happening. But today, you still have the ability to go to an insurance company, or a whole series of them, and get $10 million, $20 million, or $30 million investments from them, commitments to fund. There is activity.

From a direct investment perspective, there’s also interest and focus in Japan. There is an “Open for Business” sign hanging off Tokyo Tower presently.

Hughes: Are you surprised at the amount of capital that’s actually come out of Asia over the last 12 to 18 months?

Pardee: I’m not surprised, mainly because it’s been a continuation of what we saw from the bottom to the present. There certainly have been new actors. There is a lot happening from Malaysia presently, flowing towards the U.S. Before they started having political issues, the Thais seemed like they were about to become active. The amount of activity in the countries I named previously has been fairly robust. The Koreans also are very active.

There’s a lot of money there. The economies are growing. And they’re looking for opportunity, certainly, within Asia. You mentioned GAW Capital. Alpha is another fund we raised in that area. But, they’re also looking for opportunities elsewhere.

One interesting feature of the very bottom—I found myself introducing Singapore to Brazil in a certain context. Now that the U.S. is back and Brazil is in a different place, the capital is finding its way here.

Hughes: One final region: the Middle East. Last, but not least.

Pardee: No surprise, the Middle East is quite busy. We have an office in Dubai. We seem to have general partners running through the region nonstop. The main players in Abu Dhabi are very active; they are investing, open for business, and looking for interesting opportunities. There—as in several other places I’ll point to through the Middle East—it’s a question of whether the fund-of-fund is the right answer or a joint venture relationship or direct deal? They are sophisticated. They’re nimble. They know how to handle real estate on their own. The fund concept is not always the right answer there. 

That said, they’re capitalized and open for business. A number of entities in Saudi Arabia are active. I would say even back, as they were quiet for a bit. The Kuwaitis are busy, if careful, to be sure. The Qataris are active, perhaps not in the same way they were in 2006 and ’07, but they are busy. In Oman, there is less activity, but there is interest. The Middle East is focused, which is a good thing, if you’re trying to raise capital.

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