preqin special report: real estate co-investments and separate accounts · 2017-10-05 · offer...

PREQIN SPECIAL REPORT:REAL ESTATE CO-INVESTMENTSAND SEPARATE ACCOUNTS

MARCH 2017

alternative assets. intelligent data.

© Preqin Ltd. 2017 / www.preqin.com2

PREQIN SPECIAL REPORT: REAL ESTATE CO-INVESTMENTS AND SEPARATE ACCOUNTS

Recent years have seen institutional investors increasingly looking for

alternatives to the blind pool fund model. For some, this has been through increased use of direct investments, but this remains impractical for many investors, particularly when investing outside their own markets. Structures such as co-investments, separate accounts and joint ventures can offer investors the opportunity to gain more exposure to attractive assets, with more control and potentially lower fees, while still accessing a third-party manager’s skill and pipeline of potential deals.

Drawing on the results of a series of in-depth interviews with institutional investors and fund managers in Q4 2016, and the profiles for thousands of GPs and LPs on Preqin’s Real Estate Online, this report explores how institutional investors and fund managers are using these alternative structures.

KEY ATTRACTIONSFig. 1 shows that the key benefit of separate accounts for investors is the additional control over the direction of their capital that comes with a bespoke vehicle, while reduced fees and the prospect of better returns are also

key factors. Added control is the most attractive feature of co-investments, but the opportunity to put more capital to work is also an important reason why investors look to co-invest alongside managers.

23%

8%

8%

23%

8%

31%

31%

54%

23%

14%

18%

36%

41%

41%

45%

50%

0% 10% 20% 30% 40% 50% 60%

Other

Gain Knowledge of Sector/Location

Strengthen Fund Manager Relationships

Increase Exposure to Attractive Assets

Put More Capital to Work

Reduced Fees

Better Returns

More Control over Investments

Co-Investments Separate Accounts

Source: Preqin Investor Interviews, December 2016

Proportion of Respondents

Fig. 1: Key Attractions of Co-Investments and Separate Accounts for Institutional Investors in Real Estate

5%

2%

10%

19%

28%

42%

65%

65%

0% 10% 20% 30% 40% 50% 60% 70%

See No Benefits

Other

Benefits the Asset

Opportunity to EnhanceProduct Differentiation

Opportunity to BetterManage Risk

Improves Chance ofSuccessful Fundraise

Strengthens LPRelationships

Access to AdditionalCapital for Deals

Source: Preqin Fund Manager Survey, November 2016Proportion of Respondents

Fig. 2: Key Benefits for Private Real Estate Fund Managers of Offering Co-Investment Opportunities to Investors

10%

6%

17%

38%

40%

40%

0% 10% 20% 30% 40% 50%

See No Downsides

Other

Negative Impact on Relationship with LPsNot Offered Co-Investment Rights

Additional Costs/Resource

Co-Investors Have MoreControl over Investment

Differences in Timing, Termsor Rights of Co-Investors

Source: Preqin Fund Manager Survey, November 2016Proportion of Respondents

Fig. 3: Key Downsides for Private Real Estate Fund Managers of Offering Co-Investment Opportunities to Investors


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For firms managing private real estate funds, it is the opportunity to raise additional capital and to build relationships with their LPs that are the key attractions of offering co-investment rights, as shown in Fig. 2. Many also stated that offering co-investment opportunities could help the fundraising process, suggesting that this is something many institutions are factoring into their decision-making process when evaluating fund managers. The most commonly stated downsides were the challenges associated with managing a deal with multiple investors that may have different timelines for their decision-making processes or different co-investment terms, as well the reduction in control over a particular investment (Fig. 3). The additional cost of reporting and structuring these co-investments is also a potential negative for many firms.

WHICH INVESTORS ARE TARGETING THESE ROUTES?The ability of an investor to allocate capital through separate accounts, joint ventures

and co-investments is closely linked to its size, with larger institutions more likely to have more staff and the experience needed to source, review and monitor these investments. As illustrated in Fig. 4, around 60% of investors with assets of $10bn or more invest, or are considering investing,

through these routes to market, while less than one-quarter of those that manage up to $1bn in AUM are considering these structures.

Fig. 5 and Fig. 6 show how the likelihood of allocating capital through co-investments

24%

35%

57%

22%

31%

64%

21%

35%

60%

0%

10%

20%

30%

40%

50%

60%

70%

Less than $1bn $1-9.9bn $10bn or More

Co-Invest orConsideringCo-Investing

Invest or ConsideringInvesting viaJoint Ventures

Invest or ConsideringInvesting viaSeparate Accounts

Source: Preqin Real Estate Online

Prop

ortio

n of

Inve

stor

s

Assets under Management

Fig. 4: Institutional Investor Appetite for Co-Investments, Joint Ventures and Separate Accounts by Assets under Management

13%

53% 53% 60% 58% 65%75% 80%

6%

7%16%

11% 14%9%

10% 8%

81%

41%31% 29% 28% 26%

14% 12%

0%10%20%30%40%50%60%70%80%90%

100%

Sove

reig

nW

ealth

Fun

d

Ass

et M

anag

er

Fam

ily O

ffic

e

Publ

ic P

ensi

onFu

ndIn

sura

nce

Com

pany

Priv

ate

Sect

orPe

nsio

n Fu

ndEn

dow

men

tPl

an

Foun

datio

n

Invest via SeparateAccounts

ConsideringInvesting viaSeparate Accounts

Do Not Invest viaSeparate Accounts


Prop

ortio

n of

Inve

stor

s

Fig. 6: Institutional Investor Appetite for Real Estate Separate Accounts by Type

20%30%

49% 54%69% 74% 74% 76%

20%19%

13%12%

11%10% 11% 10%

60%52%

38% 34%20% 15% 15% 14%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Sove

reig

nW

ealth

Fun

d

Fam

ily O

ffice

Insu

ranc

eCo

mpa

ny

Ass

et M

anag

er

Publ

ic P

ensi

onFu

nd

Endo

wm

ent

Plan

Foun

datio

n

Priv

ate

Sect

orPe

nsio

n Fu

nd

Co-Invest

ConsideringCo-Investing

Do NotCo-Invest


Prop

ortio

n of

Inve

stor

s

Fig. 5: Institutional Investor Appetite for Real Estate Co-Investments by Type

Increased control for the investor is the biggest attraction for institutions looking for

co-investments or separate accounts – and a major drawback for managers offering them

© Preqin Ltd. 2017 / www.preqin.com4

PREQIN SPECIAL REPORT: REAL ESTATE CO-INVESTMENTS AND SEPARATE ACCOUNTS

and separate accounts changes with the type of investor. Sovereign wealth funds, which typically have very large amounts of capital to put to work and sizeable internal teams (often in multiple locations), are very likely to be active through these routes. Other groups such as family offices or asset managers, which are typically more experienced in making direct real estate investments, are also more likely to make co-investment or separate

account commitments. Groups such as endowment plans and foundations, which in many cases have less AUM and smaller investment teams, are less likely to consider these routes to real estate.

SEPARATE ACCOUNTSAs illustrated in Fig. 7, both the number of separate accounts and the total capital secured by real estate managers for these vehicles have fallen slightly over

2015-2016 compared with 2013-2014. Despite this, capital raised for separate accounts remains well above that secured prior to 2013: a total of $67bn was raised through separate account structures between 2013 and 2016, compared with $25bn from 2009 to 2012. The decline in fundraising over 2015-2016 reflects a small decline in appetite for these structures among investors in recent years: 30% of respondents stated they would invest in

15

2116

13

29 30 29

5955

48

36

2.85.0 3.1 3.7

6.8 7.5 6.6

16.9 19.016.2 14.9

0

10

20

30

40

50

60

70

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

No. of SeparateAccountsAwarded

AggregateCommitments($bn)


Fig. 7: Private Real Estate Separate Accounts Awarded, 2006 - 2016

44% 39% 33%

27%29%

33%

29% 33% 34%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2014 2015 2016

More than 20% ofInvestors

1-20% of Investors

None

Source: Preqin Fund Manager Survey, November 2014 - November 2016

Prop

ortio

n of

Res

pond

ents

Fig. 8: Proportion of Fund Managers that Offered Co-Investment Opportunities to Their LPs, 2014 - 2016

3% 7% 5%

53%54% 61%

44% 39% 34%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Co-InvestmentOpportunities

Joint Ventures SeparateAccounts

Offer More

Offer Same Amount

Offer Fewer

Source: Preqin Fund Manager Survey, November 2016

Prop

ortio

n of

Res

pond

ents

Fig. 10: Fund Managers’ Plans to Offer Co-Investment Opportunities, Separate Accounts or Joint Ventures in 2017 Compared to 2016

76%

24%

Offer Co-InvestmentOpportunities

Do Not Offer Co-InvestmentOpportunities


Fig. 9: Private Real Estate Funds in Market Currently Offering Co-Investment Opportunities

0% 100%

67%of fund managers offered co-investment opportunities to their investors in 2016.

44%of fund managers expect to offer their investors more co-investment opportunities in 2017; just 3% will offer fewer.


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separate accounts in 2014, compared to 27% in 2016.

Among the notable separate accounts formed in 2016 is the €1.3bn European retail mandate secured by Hines from Germany-based pension fund Bayerische Versorgungskammer and GLP Japan Development Venture II, as well as the $900mn partnership between Global Logistics Properties and CPP Investment Board, which targets opportunistic investments in Japanese logistics assets.

CO-INVESTMENTSFund managers are increasingly offering co-investment opportunities to their investors; the number of managers that do not offer co-investments has fallen since 2014 (Fig. 8). In many cases, these

are only offered to a small sub-set of LPs, but one-third do offer co-investments to more than one-fifth of their investors, and a not insignificant 13% of fund managers offered co-investment deals to all their investors in 2016. In most cases, relatively few investors choose to take up these opportunities, with 39% of fund managers reporting that none of their investors offered co-investments did end up making a co-investment, while a further 21% reported that only 10% or less of the investors they offered a co-investment did choose to invest.

As illustrated by Fig. 9, over three-quarters (76%) of private real estate funds currently in market are also offering co-investment opportunities. This demonstrates fund managers’ positive response to investor

demand for these alternative structures and will enable managers to attract more capital commitments.

OUTLOOK FOR 2017Fund managers are clearly seeing the benefits of offering investors access through these routes: Fig. 10 shows that sizeable proportions of respondents will offer more of these opportunities to investors in the coming year, and small proportions expect to offer fewer. This is most notable for co-investments: 44% expect to offer their investors more co-investment deals, suggesting managers are seeing the potential benefits of these structures in terms of gaining extra capital and cementing their LP relationships.

Fig. 11: Notable Private Real Estate Separate Accounts Awarded in 2016

Separate Account Firm Investor Initial Equity Size (mn) Strategy Geographic

FocusIndustry

Focus

BVK - Hines Value Added Separate Account Hines Bayerische

Versorgungskammer 1,300 EUR Core, Value Added Europe Retail

GLP Japan Development Venture II

Global Logistic Properties CPP Investment Board 900 USD Opportunistic Japan Logistics

BVK - Deutsche Asset & Wealth Management Real Estate Debt Separate Account

Deutsche Asset & Wealth Management

Bayerische Versorgungskammer 750 EUR Debt

North America,

West EuropeDiversified

Goldman Sachs - Blue Sky Private Real Estate Separate Account

Blue Sky Private Real Estate Goldman Sachs 1,000 AUD Opportunistic Australia Student

Housing

WSIB - Calzada Capital Partners Core-Plus Separate Account II

Calzada Capital Partners

Washington State Investment Board 750 USD Core-Plus,

Value AddedNorth

AmericaOperating

Companies

SFERS - CIM Group Diversified Separate Account CIM Group San Francisco Employees'

Retirement System 700 USD Core, Value Added US Diversified

NYSTRS - Blackstone Separate Account Blackstone Group New York State Teachers'

Retirement System 500 USD Debt US, UK Diversified

BVK - CapMan Real Estate Residential Separate Account CapMan Real Estate Bayerische

Versorgungskammer 400 EUR Core Nordics Residential

UBS (I) Zurich Italy - Real Estate Fund

UBS Asset Management Zurich Insurance Group 400 EUR Core, Core-Plus Italy, Europe Diversified

BVK - PATRIZIA Residential Separate Account

PATRIZIA Immobilien AG

Bayerische Versorgungskammer 400 EUR Core, Core-Plus,

Value Added Europe Residential


Real estate managers are seeing the advantages of offering alternative

structures to investors, with 76% of private real estate funds in market also providing co-investment opportunities

81%of sovereign wealth funds invest in separate accounts.

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PREQIN SPECIAL REPORT:REAL ESTATE CO-INVESTMENTSAND SEPARATE ACCOUNTS

MARCH 2017


preqin special report: real estate co-investments and separate accounts · 2017-10-05 · offer...

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