High interest rates, persistent inflation, and the denominator effect hit private real estate hard in 2022. This, as private real estate funds “raised $128.6 billion across 267 vehicles, down 28.4% from the $179.6 billion raised by 549 funds in 2021,” according to an update by Pitchbook.
Dry powder levels “faced a similar downward trend from a peak of $486.3 billion in 2021 to $423.1 billion in 2022,” the report from Pitchbook noted.
The report added that opportunistic real estate funds “made up the largest proportion of the overall capital raised with $67.1 billion or 52.1% across 166 vehicles, the highest percentage since 2008.” The research report from Pitchbook added that Brookfield’s mega-fund closing on $17.0 billion “represented 25.3% of the fundraising total for the strategy.”
Opportunistic funds “are considered to be more flexible and nimbler during downturns.”
The strategy that experienced the most significant decline between 2021 and 2022 “was value-add, which raised $30.0 billion in 2022 compared to $56.0 billion just a year earlier.”
The report further revealed that this decline “may have occurred because inflation makes the cost of implementing major renovations expensive.”
Unlike opportunistic funds, value-add strategies “do not have a high enough return profile for investments in the space to beat out the negative effect of interest rates on returns.”
It is also possible “that value-add capital was raised through vehicles that are not captured through closed-end real estate fund data, which may explain the dramatic drop.”
Private real estate “diverged in valuations from public real estate: According to Nareit data, the public real estate index was down -24.9% for 2022, while the annual returns of private real estate over the same period were up 6.6%.”
The challenging macroeconomic environment in 2022 “brought significant downward pressure in private real estate.”
The report added:
“Real estate funds raised $128.6 billion across 267 vehicles throughout 2022—the lowest fundraising figure since 2013 and the lowest fund count since 2009—representing a staggering 28.4% drop from the $179.6 billion raised by 549 funds just a year earlier in 2021.”
Dry powder levels “fell 13.0% from $486.3 billion to $423.1 billion between 2021 and 2022.”
According to Pitchbook, this decline in private real estate fundraising “was influenced by a variety of factors, including higher-than-expected interest rate hikes, persistent inflation, and the denominator effect, which hit LP private market portfolios hard.”
This was particularly evident “in the fundraising numbers in the back half of the year:”
There was “a 65.4% decrease between the $44.4 billion raised in Q3 2021 and the $15.4 billion in Q3 2022, and a 27.8% decrease from the $70.1 billion raised in Q4 2021 versus the $50.6 billion in Q4 2022.”
The report continued:
“Seven out of 10 of the largest real estate debt funds raised in 2022 were over the $1 billion mark. At the top of the list was Oaktree Real Estate Debt Fund III, which raised $3.0 billion for commercial and residential debt, followed closely by Bridge Debt Strategies Fund IV, which raised $2.9 billion for debt investments across multifamily, office, senior housing, and logistics sectors.”
The report pointed out that of “the seven vehicles that raised over$1 billion, six of these vehicles were raised out of North America, while one—SWAMIH Investment Fund I—was raised out of India, securing over $1.9 billion for residential debt investments.”
