Capital-raising specialists get head start in a tough market

Debt funds or those with a specialist twist have won over reluctant investors, reports Jane Roberts

It has been another very tough quarter for capital raising for UK and European fund managers. In the April to June period, seven funds either got to first closings, or, in the case of three open-ended vehicles, launched with initial equity, while a handful of managers pulled in additional capital for existing vehicles.

One clear, positive theme this year has been investors’ increasing willingness to put cash into debt funds. Five managers benefitted from this trend between March and July, when they raised a total of £900m for investing in debt. Of that total, all but £158m (€180m) – which was raised by AXA in a second closing for its Senior 1 pan-European debt fund – was raised for funds with higher-yielding mezzanine debt strategies. If AXA’s €350m first closing at the start of the year is included, then more than £1.2bn has been committed to debt funds so far in 2011.

Pramerica held an extremely successful final closing in May for its mezzanine debt vehicle. The fund, managed by Andrew Radkiewicz and Andrew Macland, raised  an impressive £492m, after more than two years of fund raising and an initial £150m commitment last year by in-house, US- managed accounts, and cornerstone Dutch investor APG. The new investors were mainly Middle Eastern and North American.

M&G Investments also reached a final closing for its mezzanine debt fund, taking in another €35m in March and €168m by July, to chalk up €343m altogether. Duet Group pulled in £75m more for its vehicle, £50m of the capital through the public  market. Both Duet and AXA plan to raise further equity before final closings.

John Barakat, head of real estate finance at M&G, said the investors in M&G’s fund came from Europe and the US, attracted by the “great value commercial real estate debt offers relative to other fixed-income assets”. The fifth manager to raise capital for  debt investment was LaSalle Investment Management, which raised a completely new ‘fund’, although the LaSalle Junior Debt Fund is essentially a vehicle for one client.

Managers launching funds with one investor, at least initially, is another emerging 2011 theme. Schroders, Eurohypo and Cairn Capital are also raising capital to launch the Cairn Property Debt Fund. William Hill, head of property at Schroders, says: “We  are in detailed due diligence with a major investor to underwrite the entire fund.”

Other examples are Grosvenor Fund Management, which has just announced  its follow-on central London fund with a commitment from one investor, while Hermes calls its recently launched HUH US Real Estate Income Fund a “strategic partnership” – with Hermes’ client BTPS providing the lion’s share of the $200m commitment.

Aviva Investors kicked off a global fund of funds in May with one in-house client. The second quarter also saw Scottish Widows Investment Partnership reach a first closing on its first fund launch for seven years. Managed with Cushman & Wakefield Investors, the PURetail fund has a pan-European twist and a focus on urban retail.

Fashioning specialist products

Three open-ended funds that launched  with initial capital during the quarter have very carefully crafted strategies. CB Richard Ellis Investors and Legal & General Property fashioned products for defined contribution pension funds, after months if not years of work. Schroders launched its Global Property Income Maximiser Fund, a new securities product that has taken in £30m so far, including seed capital from Schroders.

Hill says fund manager Andrew Straughair buys stocks and sells covered call options over some of them for a profit,  which is added to the dividends to push the income return from 3-5% to 7%. If the stock price doesn’t rise above the option price, the option purchaser doesn’t exercise its right to buy. “You are converting capital growth into income; we’ve done it very successfully with a Schroders equity product,” he says.

Kevin Aitchison, UK head of ING REIM, which is due to merge with CBREi shortly, sees specialism as a key way for managers to grow in the next five years. “Managers need to offer something different,” he says. “I also see a big future for core multi-manager business, with more multi-managers putting clients into individual deals, offering something different for clients.” Aitchison’s arm of ING has benefitted from another trend that has continued this year: a move into European property by big south Asian pension funds, usually starting in London.

Asian investors learn to love the UK

“After the merger we will be huge in the UK, so overseas money is one way to grow,” he says. “I think Asian investors will follow the pattern of other overseas investors. We see part of our role as educating them about the UK market and they are keen to learn.” However, these investors, like other large international pension funds, are investing directly or in structures crafted for them, and they have a global view: several fund managers report that it is harder to get new money into UK pooled funds now.

“It seems harder to get money into the UK,” Hill agrees. “A lot of overseas investors who were interested have been reluctant to commit capital to the UK, partly due to a perception that the market has corrected.” Other investors have shown a preference for getting access to UK property indirectly via the secondary market – a trend Schroders says pegged back its new equity raising for Welput Nevertheless, there are a lot of ideas bubbling under. Of the 130 managers responding to the Property Funds Research survey, 57 said they planned launches this year, 27 of them more than one. It may be that more of the successful new funds in the second half of the year will have European rather than UK strategies.