Opportunity funds back in favour
Blackstone’s BREP VII has dominated fund launch news, but it is not the only opportunistic vehicle to attract pension fund capital. Shayla Walmlsey reports
Capital raising news has been dominated by Blackstone Group’s announcement in October that it had raised $13.3bn (€10bn) in just over a year for its BREP VII fund. The fundraising – from 250 investors, mainly US public pension schemes, against a flexible target of $10bn – created a new record: this was to be the largest opportunistic fund ever.
Although US public pension funds are by no means the only investors in Blackstone’s BREP VII fund, they are the majority. Commitments include $300m from the Pennsylvania Public School Employees Retirement System, and $200m each from the Teacher Retirement System of Texas and the Virginia Retirement System.
On the face of it, this is unsurprising. Public pension funds account for 34 of capital raised by the fund manager for all its vehicles. A further 27 comes from sovereign wealth funds and corporate pension funds. Among its investors, 64 are from the US, compared with only 60 from Europe.
Apart from Blackstone, other pension funds have also been offering capital to opportunistic funds. The State-Boston Retirement System announced a tender for a diversified closed-end value-add or opportunistic manager to be the recipient of a $40m commitment. Starwood Capital is hoping to achieve a final close for the fund by the end of the year, targeting $2-3bn. Investors in the fund include Teachers’ Retirement Ssystem of the State of Illinois and New York State Teachers’ Retirement System.
Meanwhile, Europa Capital has achieved the first close of its target €750m opportunistic European fund. Europa Fund IV’s investors include LACERA, the Los Angeles pension scheme.
Investor appetite for opportunistic funds is not just a US phenomenon. In September, Keith Breslauer, managing director of Patron Capital, announced that €880m had been raised for its fourth opportunistic fund, much of it from corporate pension funds in Europe and investors in the Middle East.
The sources of capital for the new fund has changed markedly from its predecessors, which drew capital primarily from US institutions. For Breslauer, it marks the return of European pension schemes to funds, although he does not necessarily see a wholesale shift towards opportunistic styles. He says that return-enhancing opportunistic funds are “on the margin” of inflation-hedging strategies. “European investors say they don’t have access to distressed yields but they do to core buildings,” he adds.
Blackstone’s fund, which has already deployed 35 of the capital raised, will focus primarily on North America. Patron’s much smaller fund and Europa Fund IV will target European markets.
In contrast to BREP VII, which is targeting large transactions, Europa’s fund is reportedly scouting investments that are too small for most institutional investors but too large for private ones. Yet, despite the diversity of the funds, their investors share certain characteristics. Even if investors are willing to move up the risk curve, they do so carefully.
In its tender for opportunistic fund manager, for example, the State-Boston Retirement System wants to be in at the beginning (the final close cannot happen before the end of the year). The chosen fund manager must have at least two previous value-add or opportunistic funds and at least $300m already in committed capital.
Even the negotiating terms appear familiar to those demanded by European pension schemes. Blackstone did not respond to requests for comment, but it is understood to have temporarily waived the management fee for investors willing to commit to the first close.
According to Breslauer the better-than-expected investor appetite in his fourth fund probably has to do with meeting investors’
concerns head-on. “The answer is I don’t know,” he says. “It could be that we simply work harder than anyone else and meet more people. Our returns aren’t better than other funds’. But we are afraid of leverage and the fund is transparent. I think it’s that people know what they’re are getting.”
According to the most recent Preqin data, 44 of investors plan to put their money into opportunistic funds over the next year, an increase of 2 from last year’s figure (the appetite for value-added funds fell 3 during the same period to 44.) Core funds will be the targets for 53 of polled investors.
But as Preqin senior research analyst Andrew Moylan points out, most investors with opportunistic intentions are looking for experience rather than size. “Even the larger funds are not raising as much as in 2007,” he says. “We’ve seen a reduction in the number of first-time funds, and in the number of investors willing to invest with new managers.”
AEW Europe is in the market to raise $350m for its pan-European opportunity fund. According to Russell Jewell, head of private equity funds, US investors are beginning to look at Europe again, having nine months ago viewed Europe as too risky.
None of the emerging and forecast new funds is likely to look much like Blackstone’s mega-fund “It’s unique,” says Moylan of BREP VII. “No one else will be raising a fund like that.”
For one opportunistic fund manager, who did not want to be named, the Blackstone fund is both an exception and a proof of concept.
“There continues to be a reluctance to jump back into blind-pool funds. But if you have a defined, relatively narrow strategy or you have an amazing track record, you can still raise blind-pool capital. Blackstone proves it can be done,” he says.
He adds: “There are people in the world who need to deploy $200m or $500m. Some limited partners have written a cheque to Blackstone for $500m. That’s my whole fund.”