|
Maturing Opportunistic Real Estate Private Equity Fund Sector Faces Rising Challenges |
EY Survey Points to Record Capital Raise in 2001
New York, NY -- (February 20, 2002) -- Opportunistic real estate private equity funds - also known as "opportunity funds" and "value-added funds" - raised more than $17 billion in capital from investors in 2001, according to a new survey of the industry to be released this month by Ernst & Young. The raise - the biggest annual capital closing recorded by the sector - means that these funds possess an estimated $20 billion in equity to be placed in real estate-related investments worldwide in the next few years. Applying typical 60-70 percent leverage to this equity indicates that the total value of deals expected to be closed by the sector will be in excess of $50 billion, making this sector one of the most powerful capital sources in the commercial real estate arena on a global basis.
According to Dale Anne Reiss, Global Industry Leader-Real Estate, Ernst & Young, the survey offers a telling snapshot of the current issues facing a sector of the industry that has grown to prominence in just 12 years.
"Today's opportunistic real estate private equity fund sector has its roots in the aftermath of the sell-off of failed loans and other assets by the Resolution Trust Corporation (RTC) in the late 1980s and early 1990s. Since 1991, our survey suggests the industry - which we estimate today to have in excess of 100 separate General Partners - has raised in excess of $90 billion for opportunistic investing in real estate. That's a very successful capital raising track record for any fledgling industry but particularly so in the real estate arena," said Ms. Reiss.
Nevertheless, Ms. Reiss pointed out, this successful track record of capital raising does not leave the industry immune to the growing pains experienced by other business sectors. "One of the main reasons Ernst & Young conducted this survey was to gain a greater understanding of the issues facing this sector of the industry in the day to day operation of their businesses because," she adds "without a well run and efficient organization there are opportunities to fail and less chance of success."
Survey responses were obtained by Ernst & Young's Real Estate Private Equity Funds Services Group from 48 fund General Partners and supplemented by information available and verifiable publicly. Respondents were assured anonymity and confidentiality. In total, the participants in the survey represented $72.3 billion of equity in 145 funds raised between 1988 and 2001.
Among other key findings:
More than 60 percent of the $20 billion currently available for investment by opportunity and value added funds is targeted for investment outside the United States, with the most popular locations being Western Europe and Asia.
The survey concentrated heavily on three main areas exemplifying the fact that General Partners clearly realize that opportunistic investing is now an on-going business, not just an "opportunity" with a two- to three-year window, with an infinite life organization supporting finite life funds. These key business areas are: financial and performance reporting, tax planning/strategies and business transformation/ processes. Some of the key observations made by E&Y in these areas include:
Financial and Performance Reporting
"At this point in their evolution, opportunistic real estate private equity funds are under increased scrutiny from investors and their advisors seeking greater transparency and standardization in reporting information" said Deborah Levinson, a partner in Ernst & Young's New York office. "We believe 2002 will be a watershed year in which great strides are made in these areas. The recent changes to the AICPA Audit and Accounting Guide for Audits of Investment Companies with respect to the disclosure of Financial Highlights should help in this regard," she added.
Tax Issues
"The survey confirmed our recent experience that fund General Partners are focused on revising their documents and structures to meet newly evolving industry norms to improve their chances of raising capital in this challenging market. For example, they have an increased focus on avoiding distortions in capital accounts that can cause distortions in the intended waterfall distributions, and the savings clauses that solve the problem," said Sandy Presant, Ernst & Young 's National Director of Real Estate Private Equity Fund Services.
Business Operations & Technology
"Technology use and process improvement is becoming a much greater tool in reducing cycle time and costs, creating transparency and standardization, strengthening data integrity and internal controls, mitigating risk, enhancing workflow and communication between departments, locations and joint venture partners and enhancing investor relations," said Brad Hall, National Director, Real Estate Strategy & Business Transformation.
A summary of the survey findings, contained in a white paper which includes Ernst & Young's detailed observations on the key responses - will be available to the industry on the Ernst & Young website this month at www.ey.com <http://www.ey.com>. Select survey results will be made available only to survey respondents.
Ernst & Young is a global provider of professional services. Its 77,000 people in more than 130 countries have the industry and financial experience to provide perspectives on operating successfully in the new economy. Ernst & Young offers traditional audit and tax services, as well as customized services in corporate finance, online security, risk management, the valuation of intangibles and e-business acceleration. In addition, legal services are available in various parts of the world where permitted. A collection of Ernst & Young's latest ideas on the new economy can be found at www.ey.com/thoughtcenter.