Five years ago, the top 10 on the PERE 100 was a stable group. The composition of the top private property management companies by capital raised in 2019 changed by just two companies from the previous year. Similarly, the top 10 on the 2020 rankings also changed by just two companies from the previous list.
Today, the top 10 looks very different: Blackstone and Brookfield retained their top two spots, while the other three have switched places within the top 10. But all five have fallen out of the top tier and been replaced by bigger, brighter fundraising stars.
The top 10 includes San Francisco-based investment manager TPG, the biggest climber on this year's PERE 100, surging from 21st to third place. The firm's rise to the top 10 comes after it acquired New York-based credit- and real estate-focused investment manager Angelo Gordon late last year, while the latter was ranked 12th last year but had previously been in the top 10 from 2019 to 2021.
TPG is not the only manager to have bolstered its fundraising capabilities through M&A. In fact, six of this year's top 10 have been the buyer or seller of a majority or full acquisition of a manager within the past five years, and four of those have done so within the past two years. In contrast, none of the 2019 top 10 had engaged in such a transaction at the time that year's rankings were released.
Another top 10 M&A beneficiary is New York-based alternative asset manager Blue Owl, which had no forays into private real estate until its acquisition of Chicago-based net lease specialist Oak Street Real Estate Capital in late 2021. Oak Street, which debuted at No. 20 on the PERE 100 in 2020, continued to climb to No. 15 last year before cracking the top 10 at No. 7 this year.
“Having a firm with a private wealth distribution team and international capabilities was critical to our growth because the majority of the capital Oak Street raised prior to our merger with Blue Owl was institutional and U.S.-based,” explains Mark Zahl, co-president and head of the real estate platform at Blue Owl and founder of Oak Street. “Since combining with Blue Owl, we have continued to grow in a challenging fundraising environment.”
How much and how quickly M&A contributes to a company's future fundraising success depends on whether the deal is an all-out, majority or minority acquisition, and whether both the buyer and seller are already ranked. “When two companies that were previously in the top 20 combine, they jump into the top 10,” says Drew Murphy, head of real estate at Berkshire Global Advisors, a New York-based investment bank. “There's a fundraising force behind it, because it adds more vehicles to the total capital being raised.”
But with minority deals, “you're still your own company in that scenario,” he points out, “so you're not adding another fund complex. The next fund that comes up can be larger because that partner will contribute to strengthening the business.”
So it may take longer for M&A to bolster these companies' fundraising capabilities because “it's not just putting two numbers together, you have to go through a different fundraising cycle.”
Doug Weil, founder and co-managing partner at New York-based capital advisory firm Hawes Weil & Associates, agrees that managers who sell minority stakes don't typically see a dramatic change in their growth trajectory. That's in part because counterparties typically don't provide client development or sales capabilities to companies in which they don't own a majority or full stake.
But “in most cases, minority deals come with succession planning, with the next generation either buying out or taking a larger financial stake,” he adds, “and that also creates a financial incentive for the team to lock in and keep doing what they do best, which is investing, making money and growing the business.”
Scale matters
Given that Oak Street was already on a fundraising trajectory before merging with Blue Owl, “I'd like to think it would have worked out,” Zahl said, “but that being said, there's no debate about how powerful the combination of Oak Street and Blue Owl was.”
In the first quarter, the firm closed its newest real estate focused fund, Blue Owl Real Estate Fund VI, on $5.16 billion, more than double the size of its predecessor fund and exceeding its $5 billion hard cap. On exceeding the hard cap, Saar said, “We've had to do it in previous years, but I think this has been one of the most challenging fundraising environments for private equity real estate in quite a while, so I think from that perspective, you could say this was a really good decision.”
But while size matters, Saar points to other key factors behind managers' real estate fundraising success.
“What you do in the real estate space and your track record matter more than ever,” he said, as does the company's total market size and opportunity set. “In an environment of increased stress from a volume standpoint, I think the ability to allocate capital in line with your strategy and return objectives will be key.”
Size also matters to investors, as more institutional investors concentrate capital in the hands of fewer groups. “It’s easier to allocate capital to people with a diversified product, not just in real estate but in other areas across the private markets,” Murphy says.
Additionally, some limited partners are only able to commit to a fund once the manager has reached a certain size and is able to raise larger capital, typically due to the size of the checks they write.
“While size is not explicitly factored into our manager evaluations, several key criteria tend to be positively correlated with size,” says Taylor Mammen, CEO of real estate investment advisory firm RCLCO Fund Advisors, including institutional-level asset management and reporting capabilities, research capabilities and succession depth.
“Fundamentally, as asset managers get bigger, they enjoy greater economies of scale,” he added. “I also think that if you're a large firm, it's much easier to meet the requirements of investors, or the requirements that are needed to be considered a best-in-class investment manager.”
Still, Mammen believes M&A primarily benefits management. As for the impact on investors, “I'd have to say we're a little bit neutral on that,” he said.
While there are good and bad aspects to size, “at a certain point, a manager's size may result in diminishing returns and may even be negatively correlated with other factors that matter to clients, such as access to key decision makers, transparency and the ability to negotiate attractive terms.”
M&A Outlook
While the dynamics of M&A haven't changed dramatically, today's fundraising market is tougher and more companies are under pressure to sell. “I think groups are realizing that partnering with a larger company could accelerate fundraising in the future,” Murphy says.
“Having access to someone's broader distribution network, or their retail channels, is interesting and probably more common for groups today than it was in the past.”
Mammen predicts it will be “very hard” for mid-sized investment managers to succeed going forward because of the significant costs associated with raising capital, including fees and investor demands for oversight, reporting and investigations. “Many mid-sized investment managers, given all these investor demands, will have to grow organically or artificially through mergers in order to remain profitable.”
Mid- and smaller-sized managers, such as those on the PERE 200, are also feeling the squeeze in fundraising. The top 10 companies on the PERE 100, for example, accounted for more than 30% of the total capital raised over the past five years of the ranking, according to PERE data.
“As LPs try to do more with fewer managers, it becomes increasingly difficult for mid-market and boutique managers,” Weil said. “Capital is heavily skewed toward larger managers, and the imbalance in the market is only going to get worse.”
Indeed, Mammen is concerned about what the future holds for managers: “I worry that in the future investors will have less choice, or if for some reason they don’t want to invest in the top 10 companies, it will be harder to find an alternative approach or an alternative partner.
“I definitely think we're seeing meaningful change in the industry.”
With large fund companies controlling most of the capital, he predicts that smaller firms will likely work for those managers in future, rather than seeking investment capital directly from institutional investors as they do today.
More meaningful changes are coming from ongoing M&A deals. In November, Singapore-based asset manager Keppel Corporation announced a proposed acquisition of a 50% stake in pan-European firm Airmont Capital, with the full acquisition expected in 2028. At the time of writing, Miami-based Starwood Capital Group had formed a consortium with two partners to acquire Hong Kong's ESR Group, which has climbed the rankings with multiple mergers. The changes in the asset management landscape are far from over.