Fund of funds industry prepares for its evolution

LISTEN The real estate fund of funds industry is entering a new era, says the research director at the trade body representing investors. Iryna Pylypchuk, director of research and market information at INREV – the European Association for Investors in Non-Listed Real Estate Vehicles – describes funds of funds as undergoing “an evolution” in terms of scale and the diversification they offer to investors. Inrev’s latest report – pulled together alongside its Asian sister organisation, ANREV, and NCREIF in the US – showed a third consecutive year of growth for assets under management, which hit an all-time high of €43.4bn (£37.1bn) last year.  Period of change The benefits such vehicles offer to investors in terms of their scale and diversification are well known, Pylypchuk says, and have been further underlined during the pandemic.   “What we have seen recently is similar to what we have seen in broader non-listed real estate – it’s an evolution of diversification, an evolution of the investible universe, as well as a shift towards scale and core strategies,” she says. Funds of funds with a core style account for a little under half of the fund of funds market by number but 94% of total asset value, with an average per fund of €1.8bn. “We’ve seen concentration in the fund of funds industry – growth in the large funds of funds, which tend to be significantly larger in size,” Pylypchuk says. “This says something about the scale, size and preference in terms of strategy.” Global strategies dominate, INREV’s research shows, overshadowing national approaches. “In the UK, for example, we’re seeing a consolidation of local government pension funds into more pooled structures,” Pylypchuk says. “That creates a very different demand environment and perhaps less requirement for UK-specific fund of fund strategies – because [the investors] are larger, now they can do some of that in house and are looking for more European or global strategies instead.” Operational focus The industry is also being reshaped by an expansion of the kinds of assets that funds are targeting – and their channels into the market. “We see a significant evolution of the underling investible universe as we see a stronger demand and allocations to newer, less established, more operational segments of real estate,” Pylypchuk says. “That is coming through from investor demand for such products and feeds all the way up into the fund of funds strategies. As a result, it also diversifies the route into the market. A lot of the more operational sectors are easier to access via jv structures rather than pure funds. “We also see some examples of funds of funds making small allocations to direct investment. That really stretches the old definition of funds of funds because we now see jvs and club deals with direct allocation.” It is likely to be some years yet before the next stage of the market’s development becomes clear, Pylypchuk adds, but the direction of travel is already apparent.  “It’s about core strategies, the shift towards global and a broader diversification in terms of scale, size, geography, access route, number of vehicles and number of fund managers,” she says. “All of that combined is what gives value-add to the underlying investor.” To send feedback, e-mail tim.burke@eg.co.uk or tweet @_tim_burke or @EGPropertyNews See also: Real estate has plenty of data – and now needs to use it, says INREV boss Photo © INREV