What Drives Real Estate Private Equity Fundraising Success? And How to Pick Top-Performing Funds

Abstract

The paper examines the fundraising success and failure of closed-end real estate private equity (REPE) funds over the time period 2004 to 2014. The paper aims (a) to identify some key drivers of success or failure and (b) to clarify whether fundraising metrics can serve as an a priori indicator for a fund's later performance. Our findings may be of significant value for investment decision makers and fund managers considering to launch a new REPE fund.

To the best of our knowledge, we are the first in (real estate) private equity research to include information of canceled fundraising drives. This information is retrieved from a proprietary dataset provided by Preqin Ltd. Abandoned funds are those for which the fundraising process started but never completed, with the consequence that the fund never closed and no investment of funds ever took place. Since abandoned funds were not launched, they never entered common databases. We merge this ‘fundraising loser’ dataset with a global dataset of launched REPE funds, define several stages of fundraising success, and identify drivers for fundraising success.

Our results are can be summarized in four points.

First, although being higher for first time managers, the likelihood of an unsuccessful fundraising does not depend on the issuing manager’s experience; there appears no significant relation between cancelations and fund serial numbers. Also, cancelling a fundraising does not drive a manager out of business. Many successfully raise subsequent funds. However, abandoning a fund sends a strong signal to the market, as the chances to close a fund following a canceled fundraising drive decrease by some 20 percent and the funds that are being closed turn out to be significantly smaller than those of managers that did not cancel a previous fundraising drive.

Second, the reduced ability of collecting equity commitments seems to be anticipated by the fund managers, as they do not collect a lower percentage of the target fund size, which suggests that managers become more careful and set lower fundraising targets after they had to abandon a fund.

Third, on average, a REPE manager’s fundraising success is closely related to the ability to invest the equity committed to previous funds, to reputation, and to the performance of the predecessor fund. Fourth, oversubscribed funds are associated with lower equity multiples delivered to the investor and funds with a shorter fundraising time are likely to outperform their peers, which suggests that a fund’s fundraising metrics may be able to forecast its later performance.

Keywords: Private Equity, Real Estate, Fundraising, Capital Commitments, Fund Origination, Institutional Investments

JEL Classification: G23, G24, G11, E22