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Hard times loom for 'one-fund wonders'

Many fledgling private equity real estate fund managers could be severely affected as limited partners look to place larger amounts of capital with fewer GPs.

The industry could be facing a divide between the haves and have-nots as limited partners look to cut the number of firms they invest with, a New York real estate conference crowd was told today.

After several years of rapid growth, the private equity real estate industry is set for a period of consolidation, with firms raising their first and second funds expected to be the worst affected.

California Public Employees Retirement System (CalPERS) is one such LP starting to “streamline” the number of firms it works with, according to senior industry professionals, with the pension fund seeking to cut its exposure to the number of real estate fund managers over the next three to five years.

Speaking at the IMN US Real Estate Opportunity and Private Fund Investing Forum in New York today, Peter Schaff, chief executive of LaSalle Investment Management's North America operations, said the industry was set for a period of downsizing.

Following years of “rapid expansion” in the number of fund managers entering the private equity real estate arena, LPs such as CalPERS are now “very intentionally looking to rationalize, to streamline and to reduce the number of managers they are doing business with.”

Firms, he said, would be judged increasingly on their track records, and the returns generated from existing investments.

Predicting a raft of “one-fund wonders,” Schaff added that first-time funds would have a higher “bar” to hit in future to attract commitments from LPs with funds needing to offer investors “a really good story, really good credentials. It had better make sense.”

He was joined by Michael Coster, managing director of Lazard Freres, and Chuck Purse, managing principal of placement agent Park Hill Real Estate Group, both of whom told the conference first- and second-time fund managers would have to work harder to secure commitments. Purse added that several funds were set to follow CalPERS decision to consolidate their fund manager relationships.

LPs, Coster argued, were looking not just at internal rates of return but also “whole dollar mutiples,” where funds can demonstrate a “track record realization.”

Institutional investors, he went on, had been “swamped” with the number of new managers coming to the market that they were now “trying to focus their efforts.”