Preqin Special Report: Real Estate Co-Investment Outlook
Content Includes:Fund ManagerPerceptionPreqin Special Report:Real Estate Co-Investment OutlookMarch 2016Managers recognizethe importance of coinvestments in buildingstrong relationships withinvestors.Co-Investment ActivityMajority of managerscurrently offer coinvestment rights toinvestors.The Co-InvestmentRelationshipWhat are the requirementsfor LPs to qualify for coinvestment rights?InvestorsInvestor appetite forco-investments grows;exposure to attractiveassets is key appeal.alternative assets. intelligent data.
Preqin Special Report: Real Estate Co-InvestmentsDownload the data pack:www.preqin.com/RECOINV16ForewordRecent years have seen an increase in investors seeking real estate exposure through alternative routes to market to commingledfunds. A co-investment structure can offer investors more exposure to attractive assets, reduced fees, the opportunity to put largeamounts of capital to work and a greater degree of control over their investment portfolio, while still accessing the skill and pipelineof deals of third-party fund managers.In order to find out more about this growing area of the asset class, we have surveyed 75 active real estate fund managers tobetter understand the changing levels of co-investment participation and find out their views on the perceived risks and attractions.Furthermore, this information is enhanced by the results of our survey of 100 institutional investors, as well as data taken from thein-depth profiles of more than 5,000 institutional investors featured on Preqin’s Real Estate Online.Real estate fund managers are recognizing how important co-investment rights are becoming to investors; our survey foundthat most managers feel offering co-investment rights is important during fundraising, and the vast majority currently offer or areconsidering offering co-investment rights to their investors. In fact, 41% of respondents stated that more than 80% of investors intheir latest funds were offered co-investment rights in 2015, compared with just 9% of respondents stating this in 2014.The main motivations for investors to seek out co-investments are greater exposure to attractive assets, the prospect of greaterreturns and lower fees. Most LPs actively co-investing reported that their co-investments have delivered superior returns to theirreal estate fund commitments, although many feel it is too early to tell, indicating that this remains a new approach for numerousinstitutions. Reduced fees are often attractive to LPs, with the majority of GPs also reporting that they charge lower managementfees and carried interest on co-investment arrangements than pooled funds, or charge no fees at all.To find out more about Preqin’s Real Estate Online, or for more information on co-investments, please do not hesitate to contactus at info@preqin.com or at our New York, London, Singapore, San Francisco or Hong Kong offices.ContentsFund Manager Perception of Co-Investments3Fund Manager Co-Investment Activity4The Co-Investment Relationship6Investor Appetite for Co-Investments7Investor Co-Investment Activity8The Leading Source of Intelligence on the Real Estate IndustryPreqin’s Real Estate Online is the leading source of intelligence on the private real estate fund industry.This constantly updated resource includes details for all aspects of the asset class, including net-to-investor fundperformance, fundraising information, institutional investor profiles, fund manager profiles and more.For more information, please visit:www.preqin.com/reoAll rights reserved. The entire contents of Preqin Special Report: Real Estate Co-Investment Outlook, March 2016 are the Copyright of Preqin Ltd. No part of this publication or any information contained in it may be copied, transmitted by anyelectronic means, or stored in any electronic or other data storage medium, or printed or published in any document, report or publication, without the express prior written approval of Preqin Ltd. The information presented in Preqin SpecialReport: Real Estate Co-Investment Outlook, March 2016 is for information purposes only and does not constitute and should not be construed as a solicitation or other offer, or recommendation to acquire or dispose of any investment or toengage in any other transaction, or as advice of any nature whatsoever. If the reader seeks advice rather than information then he should seek an independent financial advisor and hereby agrees that he will not hold Preqin Ltd. responsible inlaw or equity for any decisions of whatever nature the reader makes or refrains from making following its use of Preqin Special Report: Real Estate Co-Investment Outlook, March 2016. While reasonable efforts have been made to obtain information from sources that are believed to be accurate, and to confirm the accuracy of such information wherever possible, Preqin Ltd. does not make any representation or warranty that the information or opinions contained in Preqin SpecialReport: Real Estate Co-Investment Outlook, March 2016 are accurate, reliable, up-to-date or complete. Although every reasonable effort has been made to ensure the accuracy of this publication Preqin Ltd. does not accept any responsibilityfor any errors or omissions within Preqin Special Report: Real Estate Co-Investment Outlook, March 2016 or for any expense or other loss alleged to have arisen in any way with a reader’s use of this publication.2 2016 Preqin Ltd. / www.preqin.com
Download the data pack:www.preqin.com/RECOINV16wwPreqin Special Report: Real Estate Co-InvestmentsFund Manager Perceptionof Co-InvestmentsDiscussions surrounding the disintermediation of real estateare becoming more common, and increasing numbers ofinstitutional investors are exploring alternatives to pooled fundcommitments. Reflecting this trend, the majority of real estatefund managers feel that it is important to offer potential investorsco-investment rights when seeking new commitments, and thatthis increases the chances of a successful fundraise (Fig. 1).Given this, it is perhaps unsurprising that 57% of fund managersexpect to offer more co-investment opportunities to investors in2016 than they did in 2015, while just 2% expect to offer fewer.We asked real estate fund managers what they perceive tobe the positives and negatives of offering LPs co-investmentrights. Just 6% of respondents stated that there are nobenefits in offering LPs co-investment rights (Fig. 2). Thesurvey revealed that the most important benefit for fundmanagers is that it helps build a stronger relationship with theirinvestors, with co-investments likely to help establish longterm partnerships, while access to additional capital is also animportant consideration for a large proportion of firms.Fig. 1: Fund Managers’ Views on the Importance ofBeing Open to Offering Co-Investment Rights for aSuccessful Fundraise6%Vitally Important29%29%Very ImportantQuite ImportantNot Important35%Source: Preqin Fund Manager Survey, H2 2015Co-investments do present managers with challenges however,with the additional costs associated with reporting or setting upspecial purpose vehicles named by 44% of firms as a downside(Fig. 3). The potential for a deal to be delayed, the problemsassociated with the timing or rights of co-investors and theloss of control of an investment were also named as importantconsiderations.Fig. 2: Fund Managers’ Perceived Benefits of OfferingInvestors Co-Investment RightsFig. 3: Fund Managers’ Perceived Disadvantages ofOffering Co-Investment RightsBuilds a StrongerRelationship with InvestorsAccess to AdditionalCapital for DealsImproves the Chance ofa Successful FundraiseOpportunity to BetterManage RiskOpportunity to EnhanceProduct Differentiation82%71%37%15%Differences in the Termsor Rights of Co-Investors39%Co-Investors Have MoreControl over the Investment39%20%Other2%7%None6%0%41%Negative Impact onRelationships with Other Investors15%None44%Slows Deals Process49%Benefits the AssetOtherAdditional Costs/Resource20%40%60%80%100%Proportion of RespondentsSource: Preqin Fund Manager Survey, H2 201514%0%10%20%30%40%50%Proportion of RespondentsSource: Preqin Fund Manager Survey, H2 2015Data Source:View comprehensive information on more than 3,200 private real estate fund managers on Preqin’s Real Estate Online.Detailed information includes total capital raised; estimated dry powder available for investment; strategy, property andgeographic investment preferences; funds closed historically and in market; historical performance; known investors anddirect contact details for key decision makers.For more information, please visit:www.preqin.com/reo 2016 Preqin Ltd. / www.preqin.com3
Download the data pack:www.preqin.com/RECOINV16Preqin Special Report: Real Estate Co-InvestmentsFund ManagerCo-Investment ActivityFund Manager OfferingsNearly two-thirds (63%) of real estate fund managers surveyedoffer co-investment rights to their investors, and a further 25%are considering doing so in the future (Fig. 4). No respondentshad previously offered co-investments in the past that do notoffer them any longer. Just 12% of firms do not expect to offerco-investments, reflecting how prevalent these structures arewithin the real estate fund market.Syndicated co-investments, whereby a fund manager sellsdown a portion of equity to select LPs after a deal has beencompleted, are the most prevalent type of co-investments,offered by 58% of surveyed real estate fund managers (Fig.5). Only 19% offer the opportunity for LPs to co-lead, whereFig. 4: Proportion of Fund Managers Offering CoInvestment Rights to Their Investorsthe investor will contribute a similar share to the fund managerand has a leading role in deal origination. An even smallerproportion (17%) offer the co-sponsorship model, whichrequires a significant level of due diligence from investors at anearly stage in the deal process. It is noteworthy that these lattertwo options, which allow investors more active roles alongsidefund managers, are the least prevalent.Fig. 6 shows the typical stage in the investment cycle at whichfund managers offer co-investment rights to LPs. The mostcommon point at which investors are offered co-investmentrights is during the fundraising process or during the bid fordeals. It is rarer for fund managers to offer them at final closeof the fund, with only 3% of respondents doing so.Fig. 5: Types of Co-Investment Opportunities FundManagers Offer Investors12%Offer Co-InvestmentRights0%Considering OfferingCo-Investment Rights25%63%Previously OfferedCo-Investment Rightsbut Do Not AnymoreDo Not Offer CoInvestment RightsProportion of GP 9%60%50%40%29%30%21%20%11%10%3%At Final Closeof FundPre-Marketingof FundPost-DealCompletionDuring Bid forDealDuringFundraisingProcess0%Source: Preqin Fund Manager Survey, H2 20154Fig. 7: Proportion of Investors Offered Co-InvestmentOpportunities by Fund Managers, 2014 vs. 2015Proportion of Investors OfferedCo-InvestmentProportion of GP Respondents70%Co-SponsorSource: Preqin Fund Manager Survey, H2 2015Source: Preqin Fund Manager Survey, H2 2015Fig. 6: Typical Stage in Investment Cycle at Which FundManagers Offer Co-Investment Rights to %Proportion of GP RespondentsSource: Preqin Fund Manager Survey, H2 2015 2016 Preqin Ltd. / www.preqin.com
Download the data pack:www.preqin.com/RECOINV16wwPreqin Special Report: Real Estate Co-InvestmentsIn order to track the changes and developments in the privateequity real estate co-investment space, we asked fundmanagers about their activity in 2015 compared to 2014, withthe results clearly illustrating the growth of co-investmentsin a relatively short period of time. Fig. 7 demonstrates thatGPs are generally offering an increasing proportion of theirLPs co-investment opportunities; between 2014 and 2015,the proportion of fund managers offering 0-40% of their LPsco-investment opportunities has dropped, and in turn, theproportion offering these opportunities to more than 80%of their investors has risen considerably. In 2014, 9% of realestate firms were offering more than four out of five investorsco-investments – this rose to 41% in 2015.However, there appears to be some disparity in the proportionof investors approached with co-investment opportunities andthose that actually committed to such transactions with thefund manager. Fig. 8 shows that, surprisingly, the greatestproportion (39%) of real estate fund managers stated that noneof the investors they offered co-investment opportunities to in2015 took them up, albeit a reduction on the 61% of LPs thatstated the same in 2014.Generally, LP co-investors make up less than half of the equity ina deal; however, the proportion of fund managers that indicatedtheir LP co-investors contributed over 40% of the equity in realestate deals rose from 54% in 2014 to 72% in H1 2015 (Fig.9). Conversely, no real estate firms had their co-investing LPscommitting less than 20% of the equity for deals in H1 2015,compared to 18% in 2014.Fig. 9: Proportion of Equity from LP Co-Investors in Deals,2014 vs. -10%28%6%11%0%61%39%20%40%60%80%Proportion of GP RespondentsSource: Preqin Fund Manager Survey, H2 2015Size of Co-Investment DealsFig. 10 shows the average proportion of deals completed in2014 and 2015 that included LP co-investors by deal size. Theoverall trend is that smaller deals (those less than 500mn insize) are more likely to include an LP co-investor. Our surveyresults show that there have been slight changes within eachsize bracket moving from 2014 to 2015, with the most notableshift in the category of deals worth 50-99mn. Of all 50-99mnreal estate deals completed by respondents in 2014, 47% ofthese included LP co-investors, compared with just 21% in2015.Fig. 10: Size of Deals Completed that Included LPCo-Investors, 2014 vs. 520%10%0%18%0%0%0%0% 1bnor More1-10%31-40%6%10%20%30%40%50%Proportion of GP RespondentsSource: Preqin Fund Manager Survey, H2 2015 100-499mn11-19%45%0%0%20-29%0% 50-99mn30-39%41-60%Less than 50mnProportion of Equity40-49%0%60%36%18%61-80%17%11% 500-999mn27%6%81-100%0%Average Proportion of DealsIncluding Co-Investors50% or MoreFig. 8: Proportion of Investors that Actually Co-Investedwith the Fund Manager after Being Offered theOpportunity, 2014 vs. 2015Proportion of Investors OfferedCo-Investment that Actually Co-InvestedCo-Investment Activity in 2014 and H1 2015Deal SizeSource: Preqin Fund Manager Survey, H2 2015Share Data with PreqinContribute data to Preqin to ensure the 7,800 investment professionals using Preqin Investor Network have access to themost accurate and up-to-date information on your firm.For more information, please visit:www.preqin.com/sharedata 2016 Preqin Ltd. / www.preqin.com5
Download the data pack:www.preqin.com/RECOINV16Preqin Special Report: Real Estate Co-InvestmentsThe Co-InvestmentRelationshipPreqin’s survey results highlighted the differing experiences realestate firms have when offering co-investments. For example,the largest proportion (41%) of fund managers stated thatthe capital co-invested by their investors typically equates to1-20% of the LP’s original fund commitment (Fig. 11). However,for 7% of surveyed fund managers, the co-investment capitalequated to more than 100% of their investors’ original fundcommitments.There can be a number of prerequisites for investors whenqualifying for co-investment rights. The largest proportionof fund managers rated both the speed at which the LP canevaluate and agree to co-investment and the size of the fundcommitment as high importance, with over half of respondentsstating this as a requirement to qualify for co-investmentrights (Fig. 12). The competitive bidding process and the factthat several co-investors may be waiting on one another’sFig. 11: Fund Managers’ Observations of CapitalTypically Co-Invested Alongside Fund Commitments byTheir LPsdecisions means that there is some pressure on timing, withfund managers often looking for a verbal commitment frominvestors within as little as two to three weeks.Any previous expression of interest in co-investing by theinvestor is of relative significance, highlighted by two in fivefirms, while 32% of fund managers have requirements relatingto LP reliability. Twenty-seven percent of fund managers haveno requirements at all and will offer co-investment opportunitiesto all investors.GPs report that only a certain proportion of their LPs actuallyrequest to invest alongside them. The largest share (45%) ofrespondents stated that only up to a fifth of investors in theirmost recent fund requested co-investment rights (Fig. 13). Onthe other hand, 13% of respondents saw more than 80% oftheir most recent fund investors do so.Fig. 12: Requirements for Investors to Qualify for CoInvestment Rights60%10%0%81-100% of FundCommitment17%10%More than 100% ofFund CommitmentSource: Preqin Fund Manager Survey, H2 2015Fig. 13: Proportion of Investors in Most Recent Fund toRequest Co-Investment Rights24%20%LP Bite-SizedRequirements61-80% of FundCommitment27%No Requirements,Offered to AllInvestors41-60% of FundCommitment32%30%LP Reliability41%14%41%40%Previous Expressionof Interest inCo-Investments21-40% of FundCommitment51%Size of FundCommitment10%51%50%Speed at WhichInvestor Can Decideon Co-Investment7%Proportion of GPRespondents1-20% of FundCommitmentSource: Preqin Fund Manager Survey, H2 2015Fig. 14: Proportion of Investors in Most Recent Fund toHave Co-Investment Rights Included in -60%13%61-80%31-40%0%16%8%More than 80%24%3%41-60%61-80%8%13%81-100%Source: Preqin Fund Manager Survey, H2 20156Source: Preqin Fund Manager Survey, H2 2015 2016 Preqin Ltd. / www.preqin.com
Download the data pack:www.preqin.com/RECOINV16wwPreqin Special Report: Real Estate Co-InvestmentsAs shown in Fig. 15, investor appetite for real estate coinvestments has increased slightly over recent years;approximately a quarter of investors have stated they will targetco-investments as of 2016, and a further 12% are consideringco-investments although nearly two-thirds of the real estateinvestor population will not target co-investment opportunities.Fig. 15: Investor Appetite for Real Estate Co-Investments,2012 - 2016Investor SizeProportion of InvestorsInvestor Appetite forCo-InvestmentsCo-investments have high barriers to entry for institutionalinvestors, including the requirement of larger capitalcommitments as well as the large administrative burdenand substantial human resource required to carry out thedue diligence and portfolio monitoring that accompany coinvestments. As a result, there is a clear correlation betweeninvestor appetite for co-investments and institutional investors’assets under management (AUM): 80% of real estate investorsholding less than 500mn in AUM will not co-invest, while themajority of those investors with 50bn or more will co-invest(Fig. l Co-Invest60%Will 13201420152016Wil Not CoInvest20%10%0%Source: Preqin Real Estate OnlineInvestor TypeData Source:Similarly, there are differences in appetite for co-investmentsamong differing institutional investors. Typically, investorswith larger investment teams, or those with large assetbases, demonstrate a greater propensity for co-investments.Sovereign wealth funds represent the largest proportion (62%)of investors that will invest through co-investments, followed byprivate wealth institutions (43%, wealth managers and familyoffices), asset managers (35%) and insurance companies(34%), as shown in Fig. 17.Preqin’s Real Estate Online contains information onmore than 500 investors worldwide that co-invest orconsider
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