A year for

committing
selectively

20 PERE • March 2024


While the largest
diversified funds still
rule the pack, capital is
increasingly flowing to
vehicles with a singular
investment focus. By
Charlotte D’Souza
March 2024 • perenews.com
A year for
committing
selectively
Capital flows
into vehicles
with a singular
sector focus
Cover story
O
ff the back of the
worst year for
private real es-
tate fundraising
since 2012, man-
agers running the
1,280-plus closed-end funds PERE is
tracking in market at the start of 2024
will be hoping for better.
Their challenge? Standing out in a
congested backlog of vehicles currently
seeking $417 billion in commitments
from an institutional investor pool that
has largely had its hands tied by issues
including the denominator effect and
a lack of distributions from existing
outlays. Per PERE data, this figure is
up 40 percent on one year prior, and
represents the largest January total on
record.
Despite this fundraising logjam,
PERE’s Perspectives 2024 Study found
39 percent of investors are looking to
inject fresh capital into the asset class in
the coming year. The sector specialists
are set to be key beneficiaries of this.
Indeed, PERE data also reveals an
uptick in the proportion of capital di-
rected to sector-specific real estate funds
post-covid. In both 2022 and 2021, sin-
gle-sector funds were responsible for
38 percent of total capital raised for
closed-end funds, up from an average
of 24 percent for the years 2018-20. In
those two years, 41 single-sector funds
each closed on at least $1 billion.
Momentum stalled in 2023, howev-
er, with sector-specific vehicles attract-
ing 23 percent of the $129 billion in
capital raised by closed-end funds. But
in a challenging year that saw capital
highly concentrated in just one me-
ga-fund, this proportion jumps to 30
percent if Blackstone Real Estate Part-
ners X – the $30.4 billion behemoth
and only fund that managed to surpass
the $5 billion mark – is removed from
the mix.
Both diversified and sector-specific
funds struggled to attract capital in
2023. But single-sector funds were
more likely to achieve or exceed their
Cover story
target fundraise than their sector-
agnostic counterparts. PERE data
shows 73 percent of sector-specific
funds closed met or exceeded their
target size, compared with only 64
percent of diversified funds.
Specialists were also more efficient
in attracting capital – a trend that has
become markedly more pronounced
in the past three years. The average
time spent in market by sector-agnos-
tic funds increased from 14 months for
those closed in 2021 to 22 months in
2023, per PERE data. Conversely, the
average for sector-focused funds in-
creased only marginally from 13 to 15
months.
Steven Cowins, co-chair of the
global real estate funds practice at law
firm Greenberg Traurig, believes this
fundraising momentum will continue.
“There’s room in the market for both
approaches. But I think it’s possibly
easier in the current environment to
raise capital for a sector-specific strat-
egy, because investors will be able to
look and feel more what they’ll be in-
vesting in,” he says.
To gauge how sector specialists will
fare in 2024 – with those currently in
market seeking to raise $115 billion in
commitments – PERE connected with
a number of investors, managers and
advisers globally. Together they paint a
nuanced picture of a fundraising mar-
ket that, while increasingly bifurcated,
is no less balanced.
Chasing alpha
The New Mexico State Investment
Council, which derives its wealth from
oil and gas revenues, made 10 real estate
fund commitments in 2023, per PERE
data. Three of these went to single-sec-
tor vehicles. Keith Sabol, asset class
director for real estate and real assets,
expects this approximate split between
sector specialists and diversified funds
to continue in 2024, with an expected
real estate pacing plan north of $1 bil-
lion for the Santa Fe-based investor.
Because the pacing is large relative
March 2024 • PERE 21
 Cover story

to its invested capital base, the portfolio Prior to the challenges of 2023, the number of billion-dollar sector-specific funds closed had
grown significantly (Number of funds)
has to be broadly diversified in terms
of both sectors and geographies, he
explains, with constraints on time and
25
staffing additional factors driving the
majority of the investor’s commitments
to diversified funds, which are typically
larger than single-sector funds. 20
However, given that diversified
managers have their own opinions
about the market segments and geog-
raphies that work for them, Sabol says 15

sector specialists play two key roles

in portfolio construction. “Specialty
funds are a helpful tool for fine-tun- 10
ing sector or geographic exposures,”
he explains. In addition, they allow the
sovereign fund to explore potentially
higher alpha niches in the market. 5
Sabol says a single-sector exposure
targeting alpha generation lends itself
well to underdeveloped niches, such as
0
public storage. “That sector was below 2019 2020 2021 2022 2023
the radar, maybe a decade or so ago,
and now you’ve got multibillion-dollar Source: PERE

“Specialty funds are a helpful

tool for fine-tuning sector or
geographic exposures”
KEITH SABOL
New Mexico State Investment Council

22 PERE • March 2024

 Cover story

In each of the past three years, sector-specific funds closed spent less time in market on average public companies in the space,” he
than diversified vehicles (Months)
explains. Backing a niche sector at an
Sector-specific funds Sector-agnostic funds earlier stage, however, typically means
making a smaller commitment to a
25
smaller fund, which is challenging for
a large investor such as NMSIC to do.
But the investor does not rule this
20 out. Last September, it approved a
$100 million commitment to Alterra
IOS Venture III, which was launched
by Alterra Property Group in February
15 2023 with a target of $750 million for
investment in US industrial outdoor
storage assets.
10
Alterra had an emerging track re-
cord in the space, however, having
raised $524 million for the predecessor
fund in 2022, according to PERE data.
5 “We like to see as much verifiable track
record as possible, and we try to de-
termine that it supports management’s
thesis, and that we can also get behind
0
2021 2022 2023 the thesis and have a reason to believe
there’s something about the process
Source: PERE that makes it repeatable,” says Sabol.
“The less competitive nature of the
underdeveloped niches provides an op-
portunity for institutional-quality man-
agement teams to exercise their skills to
great advantage.”

Perfect fit
For specialist managers of non-tradi-
tional property classes to attract capital
from the largest investors, then, past
performance is key. But there is anoth-
er tailwind on their side.
Post-covid, real estate’s primary
food groups of logistics, office, retail
and residential have faced a toxic cock-
tail of structural headwinds compound-
ed by a steep correction in values and
a retrenchment in bank lending. Al-
though all property sectors have been
impacted by interest rate hikes, the
degree to which this is hurting returns
varies greatly. In the US, for example,
the NCREIF Property Index measured
total returns for 2023 of -17.6 percent
from offices, compared with -7.3 per-
cent for apartments and -4.1 percent for
industrial. Hotels, on the other hand,

March 2024 • PERE 23

 Cover story

Between them, GLP Capital Partners and EQT Exeter raised seven of the 10 largest sector-specific funds closed in 2019-23
Fund Manager Fund size Sector focus Final close
($bn) date

GLP China Income Partners V GLP Capital Partners 5.00 Industrial 2022

EQT Exeter Industrial Value Fund VI EQT Exeter 4.90 Industrial 2023

GLP Japan Development Partners IV GLP Capital Partners 3.14 Industrial 2022

EQT Exeter Industrial Core-Plus Fund IV EQT Exeter 3.00 Industrial 2022

Breakthrough Life Science Property Fund Breakthrough Properties 3.00 Healthcare 2022

LOGISTIS AEW 2.96 Industrial 2021

EQT Exeter Europe Logistics Value Fund IV EQT Exeter 2.48 Industrial 2021

GLP Continental Europe Development Partners I GLP Capital Partners 2.37 Industrial 2021

GLP Capital Partners IV GLP Capital Partners 2.30 Industrial 2021

Bridge Multifamily Fund V Bridge Investment Group 2.26 Multifamily/residential 2023

Source: PERE

generated 10.3 percent. “Amid the eco-
nomic uncertainty, an investor is going
to be aware that some of the traditional
property types have some real issues,
and look at the new property types in
growth sectors that allow them to really
drive performance in a broader alloca-
tion pool,” says Mit Shah, founder and
chief executive officer of Noble Invest-
ment Group, an Atlanta-based manag-
er focused exclusively on select-service
hotels across the US. The firm has just
closed its fifth and largest commingled
fund, raising $1 billion against an $800
million target.
“Investors are cherry-picking what
they like and what they think will do
well out of this repricing, and sector
specialists will be the beneficiaries of
that,” says James Jacobs, head of real as-
sets advisory at capital advisory Lazard.
“It’s not that the mega-funds don’t play
in those sectors, but investors might
want to just augment their exposure.”
To meet this need, Cowins observes
a growing number of diversified man-
agers in the market “trying to launch
some sort of sector-specific vehicle.”
Data centers are a key recipient of
attention here. With specific techni-
cal or operational expertise required,
it shares some of the characteris-
tics that make hospitality suited to a
Among sector-specific funds closed in 2023, single-sector play. But as tenant de-
73% reached or exceeded their target size, mand for data center capacity explodes
compared with 64% of diversified funds (%)
alongside the growth of the cloud and
100
artificial intelligence, the ability to
scale is a key advantage of a data center
fund, PERE sources say.
“The size of data center properties
today has increased significantly. Most
80 leases to hyperscale tenants are 40MW
in capacity or larger, which is resulting
in very large single-asset exposures,”
says John Berg, global head of private
real estate at Principal Asset Manage-
ment. “To construct a new facility of
60
that size for a tenant today will cost
Under
target $500 million or more in the US. You
At target
may be able to add one or two assets of
that size in a large, diversified portfolio,
Over
target but your exposure within that fund to
40 the data center sector would be quite
concentrated.”
The Des Moines-based firm has
been investing in data centers for 17
years, mostly via diversified funds and
20 separate accounts, but closed its first
US data center-focused fund on $529
million in 2021, per PERE data. A Eu-
ropean counterpart with around $300
million followed last year.
Berg says investors in the firm’s data
0
Sector- Diversified center-focused funds tend to be large
specific enough to move beyond exposure to
Source: PERE the sector through diversified funds

24 PERE • March 2024


only, and see it “as a strategic and inten-
tional overweight in their portfolios.”
Stockholm-based Areim is another
diversified manager that has branched
out into raising a dedicated data center
fund. The Nordics-focused firm closed
Areim DC Fund with €446 million last
year. “Having made smaller invest-
ments in data centers through our third
and fourth multi-sector funds, we real-
ized we had trapped the huge growth
potential of this sector into a maximum
allocation with a finite life, as is typical
for a diversified fund,” says Dietrich
Heidtmann, head of global capital for-
mation. “It was a very logical step to
create a dedicated, more permanent ve-
hicle in which we could combine all our
data center activities into a single fund
and raise additional capital specific to
this opportunity.”
Smooth operators
Although most specialists in niche or
underdeveloped sectors have yet to
reach the scale of some of their diver-
sified peers, nine single-sector funds
did close on at least $1 billion last year.
“Investors are cherry-picking
what they like and what they
think will do well out of
this repricing”
JAMES JACOBS
Lazard
Three featured in the top 10 for the in-
dustry as a whole, per PERE data.
The largest single-sector fund – and
the second-largest fund overall – closed
in 2023 was the US-focused EQT Ex-
eter Industrial Value Fund VI, which
exceeded its $4 billion target to attract
$4.9 billion. Philadelphia-based EQT
Exeter primarily raises single-sector
and single-geography funds across
logistics, residential and office/life
sciences, and manages around $29 bil-
lion in real estate assets.
Rayenne Chen, partner, global cli-
ent solutions at EQT Exeter, believes
the firm’s sector-operator model can
replicate the scale of a global diversi-
fied fund through multiple smaller, sec-
tor-focused funds, but achieve greater
alignment of interest from the sector
teams, more informed and granular
investment execution, and better net
margins. “It’s like seeing a cardiologist
as opposed to your family doctor; if you
need heart surgery, you will get far bet-
ter outcomes with the specialist,” she
says.
Evidently, investors are buying into
Cover story
this thesis. Each iteration in EQT Ex-
eter’s US-focused industrial fund se-
ries, for example, has grown. The firm
is also responsible for three of the 10
largest single-sector private real es-
tate funds raised in the past four years,
PERE data shows.
Compared to when the firm started
out in 2006, Chen says sector special-
ization is much more widely accepted
today. “Many institutional investors,
especially those with less than $1 bil-
lion of assets under management, were
reluctant to take the concentration risk,
especially if they had only just begun
to invest in real estate. Now, investors
have achieved a diverse base and have,
in many cases, doubled their portfolio
allocation to real estate to 10 percent
or more. So the universe of converted
investors and available capital is sub-
stantially larger,” she explains.
Assessing the competition
EQT Exeter’s story is evidence the
sector specialists are not impeded by
the continued growth of the indus-
try’s largest diversified managers. If
March 2024 • PERE 25
 Cover story
anything, the mega-managers are in-
directly helping the specialists to grow.
Indeed, Shah is keen to emphasize
that Noble is not in direct competition
with the diversified funds that allocate
to hospitality. Instead, the increasing
activity in the sector from the likes of
Blackstone, Brookfield and Starwood
helps to institutionalize it. “This gives
ground to smaller managers to say we
can build a mouse trap to take advan-
tage of some of the dislocation, because
these larger allocators can serve as buy-
ers,” he says.
Shah also believes investors value
a blend of both vehicle types in their
portfolios. “I think about it as two ends
of a barbell: you have the sharpshooting
operator-focused strategy at one end,
and the thematic global capital alloca-
tor at the other. One will be the first
and last call on the multibillion-dollar
opportunities that move capital mar-
kets, and Noble has been the first and
last call on $50 million investments
where we can deploy $20 million of eq-
uity at a time,” he says.
Jacobs agrees specialists are not
competing with the largest diversi-
fied firms. “Specialists will continue
to grow. But they’re not taking share
from the mega-funds. They’re taking
share from the mid-market generalists,
which are really struggling today to
find a purpose,” he says.
For Richard Peacock, European
head of real assets equity at manager
Aegon Asset Management, this trend
26 PERE • March 2024
is a sobering reality. His team, the
UK and European real estate invest-
ment platform of the Aegon insurance
group, is in the process of winding up
operations. It raised two generalist ve-
hicles between 2013 and 2017, sized at
£200 million ($251 million; €233 mil-
lion) and £150 million, and recently
closed its UK open-end fund.
“I think anyone trying to raise
money these days for a general bal-
anced strategy is up against it, frankly.
From an equity-raising perspective,
“It’s like seeing a
cardiologist as opposed
to your family doctor;
if you need heart
surgery, you will get
far better outcomes
with the specialist”
RAYENNE CHEN
EQT Exeter
specialism is absolutely essential,” he
says. “This is a response to the polar-
ization we’re seeing between the win-
ners and losers in terms of the sectors
that have structural tailwinds. It’s also
a recognition that properties in opera-
tional asset classes require partnerships
between landlord and customer – they
require a deep level of expertise and
understanding of your customer.”
Even though the largest managers
are raising significant amounts of cap-
ital for diversified strategies, Peacock
believes they have evolved into pseu-
do-specialists. “Even in a diversified
wrapper they’re still only going to do
logistics, data centers, life sciences and
sectors they’ve got conviction on,” he
says. “I just cannot believe that you can
raise money today without giving your
investors some kind of idea of what
might go into this portfolio.”
A winning combination
Marten Foxon, who until late 2022
managed the global hospitality portfo-
lio of Abu Dhabi Investment Authority,
agrees even a large, $5 billion general-
ist real estate fund “doesn’t really wash
anymore” with sophisticated institu-
tional investors. “They are thinking
more specifically about where and how
their capital will be deployed.”
Foxon says ADIA’s more targeted
strategy led the sovereign investor to
concentrate capital in specific asset
classes including logistics, multifamily

and hospitality where it had the most
conviction. This included re-upping
with trusted specialists, particularly in
Asia-Pacific, where there is a greater
trend among managers to specialize, he
notes.
This is true for Singapore-based
manager CapitaLand Investment,
which sees merit in raising both di-
versified and sector-specific vehicles,
but with the addition of country-level
focus and currency diversification. Its
single-sector fundraises to date have
included Japanese yen-denominated
funds focused on office and logistics in
Japan, China-focused RMB funds tar-
geting offices and business parks, a ru-
pee-funded vehicle focused on Indian
logistics and an India-focused business
park development fund in Singaporean
dollars.
Simon Treacy, the firm’s chief exec-
utive officer for private equity real es-
tate, says offering various combinations
of products helps investors to diversify
in terms of real estate market cycle, too.
“One market might be on the way
up, and another might still be facing
headwinds at any given time. But to-
gether, you have diversification – that
kind of balancing effect which, in their
analysis, would make more sense than
having three or four investments all in
the same types of funds that have the
same underlying economic and real
estate fundamentals behind them,” he
says.
According to Cowins, currency is a
point of contention for many. “Making
one investment in one jurisdiction and
having to deal with a specific curren-
cy risk is not going to work for many
large, global funds. There needs to be
a certain size of opportunity to enable
that to be a sensible investment deci-
sion,” he says.
As a result, sector-specific funds tar-
geted at a single country – or at least
a single currency or region – “would
be the most straightforward to raise
right now.” He observes particular suc-
cess for single-country funds targeting
Cover story
Make it bespoke
To solve for targeted sector exposures, separately managed
accounts and joint ventures are increasingly appealing routes
for investors
According to Michael Hoffmann, founder of capital advisory Prospective
Advisors, some investors looking to fill specific gaps in their portfolios will
be more likely to do so in the form of a joint venture or separately managed
account than a sector-specific fund.
“We’re out with potential JVs or SMAs in manufactured housing at
the moment, we’re doing Mexican industrial – those are very niche,” says
Hoffmann. “Investors like the potential for higher returns from these
sectors. But what they really like is an ability to say, I want less leverage, or I
see an arbitrage opportunity, so I want to build a portfolio quickly and lever
it more aggressively to capitalize on that arbitrage potential and generate a
quick multiple.”
The process of deciding which type of investment vehicle is
most appropriate for an investor is like twisting a Rubik’s Cube, says
CapitaLand’s Simon Treacy. It depends entirely on an individual investor’s
approach to portfolio construction.
“Understanding the level of discretion an investor wants can evolve
into an agreement on a separate account of one, or maybe they feel
comfortable with one or two other like-minded investors coming into the
same fund where the manager may have discretion, but they require certain
approval rights that you wouldn’t ordinarily get in a diversified fund,”
he says.
Hoffmann observes that investors that receive performance-based
compensation – such as many of the Canadian and northern European
institutions – tend to favor SMAs because they can show they made the
investment decision and created that strategy with the team. The majority
of US pension funds, however, are not aggressively compensated on
performance, “making it easier for them to jump into the next Blackstone
or other large fund.”
residential, logistics or life sciences in performance track record and position
today’s market. of trust in the industry. Instead, “the
Early in 2024, while some partici- investors that used to invest with the
pants PERE spoke with see real estate mid-market generalists will split their
fundraising momentum beginning to capital – some will continue to move up
recover, others think it will remain the scale to the mega-funds and some
sluggish. What they do agree on, how- will move down, or across, and find the
ever, is that investors will be more specialists,” says Jacobs.
selective in their commitments, an “I think there’s a very good story for
approach that will continue to drive the specialists in the current market.
capital to the sector specialists. But it’s not so much the fact you’re a
Importantly, however, this will not specialist which means you’re going to
be at the expense of the very largest raise money – you’ve got to be a spe-
diversified funds, given their increas- cialist in a market that’s attractive to
ingly strong thematic focus, solid investors.” n
March 2024 • PERE 27