Signs of improvement continue to build in the real estate markets, although slowly. Global deal activity and property values are still significantly below peak levels, and the recovery is expected to take a gradual rather than a rapid course. But for investors and fund managers, this may actually be the ideal environment in which to deploy capital.
The landscape in which real estate private equity funds operate is changing, however, and these changes are directly impacting their terms and operating models. The state of the market in the aftermath of the financial crisis, especially given the continued challenges in capital-raising , has empowered investors to make greater demands of fund managers. Increasingly, investors are applying pressure over terms and fees and demanding more frequent and transparent reporting.
As a result, the pre-crisis standards for deal terms and fees have altered considerably, and fund managers are feeling pressure from investors to make modifications to fit new industry norms. Our recent survey indicates that this is especially true for new and small to medium-sized funds. Overall fund periods have shortened by an average of two years since 2007, while average investment periods have scaled back from four to three years. Preferred returns have dipped slightly, but target levered returns have dropped to the high teens, compared with the 2007 norm of more than 20%. In addition, funds increasingly are pooling returns instead of offering them on a deal-by-deal basis. While carried interest still follows the standard 80/20 structure, limited partners are demanding more favorable distribution. They are also demanding more meaningful cash commitments from general partners.
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