Global private equity dry powder, which includes real estate funds, soared to a record $2.49 trillion by mid-2023, an 11% increase compared to six months earlier, according to S&P Global Market Intelligence and Preqin data.
Investors are clearly struggling to deploy the funds they’ve raised amid a dearth of opportunities, particularly those in real estate pursuing Core, Core+ and Value Add strategies. A cloudy economic outlook coupled with mounting transaction costs and rising interest rates has muddled the waters of deal-making. Investors are in many cases opting to hold assets to avoid accruing losses, further squeezing the supply of available opportunities.
These conditions won’t dissipate imminently, and we’re seeing many firms reposition to keep income ticking over until the outlook becomes clearer, particularly by employing people skilled in maximizing returns from existing portfolios or via offering debt products to new or existing clients.
The latter is due to the remarkably robust appetite for debt, driven in part by a scramble to refinance when the outlook for interest rates remained so uncertain. Despite the slump in real estate transactions, lenders remained active throughout 2022, registering £48.6bn of new lending. That’s the third strongest year since Brexit. Risk-averse banks have ceded ground and private debt is in the ascendancy.
Investors understandably want a piece of the action. Real Estate Capital’s 2023 Debt Fund 30 raised $85 billion this year, marking a 6% growth from the previous year. We’ve seen several investors successfully pivot towards alternate avenues like debt capital or even purchasing entire debt businesses. The timing for those now raising funds doesn’t look quite attractive as it did six months ago, but interest is clearly still strong.
Many others are pursuing strategies to reposition portfolios or build out pipelines to maximise returns until buying opportunities return – this is a strategy playing out across the private equity sector, as my colleagues explored here.
We’re seeing a big rise in clients seeking to fill asset management and development positions as their portfolio strategies turn from passive to proactive. Talented individuals with the ability to reposition assets or entire portfolios, deploy funds, or professionals with strong financial backgrounds that can drive a divestment programme are in short supply and can attract very competitive remuneration packages.
The most successful investors know that proper positioning for the next cycle can herald outsized returns when opportunities do become more abundant. Our clients say their ability to adapt will be central to their success, whether that’s via seeking out new avenues for returns or pivoting to new business models. All of that will hinge on a steady supply of talented people: one of the few good things of which you can never have enough.