With the exception of distressed and privately placed debt, assets under management in the remaining alternative asset classes tracked by the survey dropped markedly. Distressed debt under management rose 19% to $7.2 billion, with 40% of the distressed debt managed by the top distressed debt manager, Oaktree Capital Management LLC.
Private equity dropped 22% to $20.1 billion, privately placed bonds rose 22% to $51 billion and venture capital dropped 13% to $14.1 billion.
Even though distressed debt assets increased, 2004 was not a banner year for distressed debt managers. While $7.7 billion and nine distressed debt funds were raised in 2004, the U.S. high-yield default rate fell to 1.5% from 5% in 2003, said Gary Robertson, of Callan Associates Inc., San Francisco, quoting data from Fitch Ratings, a subsidiary of Fimalac SA, Paris. This economic environment has created few investment opportunities for distressed debt managers, Mr. Robertson said.
REIT managers had a wild ride in 2004 that ended well, but the trip was a doozy. The market started 2004 in negative territory but finished with a 31.5% return, said Michael Grupe, senior vice president for research of National Association of Real Estate Investment Trusts, Washington.
The lineup of top 25 REIT managers reflected this with a bit of a shakeup. Barclays Global Investors — which did not report REITs in last year's survey — jumped to first place with close to $6 billion.
While BGI launched its flagship REIT index investment strategy five years ago, it was only last year that company executives initiated a campaign to acquaint BGI's institutional clients with its REIT strategies, said Amy Schioldager, managing director, head of U.S. equity indexing products at BGI in San Francisco.
"We've seen the growth across the board," Ms. Schioldager said. Industrywide, one out of eight defined contribution plans include a REIT option in their fund lineup, increased from one in 12 defined contribution plans. Executives at smaller defined benefit plans have been adding REITs as a substitute for direct real estate because smaller plans lack the size to invest directly in real estate, she said. Larger pension plans have been carving out REIT suballocations from their real estate allocations, Ms. Schioldager explained.
Deutsche Asset Management retained second position with $4.6 billion, down 18% from $5.6 billion in 2003. TIAA-CREF, which held the first spot in last year's survey, dropped to fourth place, with REIT assets under management down 41% to $4.1 billion from $7 billion.
Managers of real estate equity likewise had a shaky year, with the top 25 real estate managers switching places. Deutsche Asset Management moved up to the top spot, with a 7% increase to $13.4 billion from $12.5 billion at year-end 2003. JPMorgan Asset Management's real estate assets rose 32% to $13.2 billion from $10 billion. Morgan Stanley dropped 26% to $12.5 billion from $17 billion, causing it to fall from No. 1 to the third spot.
It's a good news, bad news situation, said Gary G. Koster, director of real estate funds for Ernst & Young LLC, New York. What kind of year a real estate fund manager had depended on where that manager was on the fund-raising-to-exit cycle. Real estate managers that were nearing the end of their funds' cycles were in heaven because high prices and capital from institutional investors eager to invest in real estate combined to make it a seller's market, he said.
Real estate fund managers who had recently raised funds and were at the beginning of their funds' lifecycles were less lucky for the same reasons. The unlucky ones are being forced to try different avenues with their investments. Mr. Koster said.
"A mature fund has a picnic in this market. If you are showing returns of 18% or 20%, it puts you in a great place with a terrific track-record when it comes to raising another fund," Mr. Koster said. "Once you get the money, your life just got really difficult for the same reasons. It was so great to sell because prices are at historically high levels."
This is forcing real estate managers with brand new funds to get more creative, he said. These managers are investing in non-traditional subasset classes such as private equity and investing in companies with a connection to real estate. They are also going overseas in search of investments that make financial sense (April 4, 2005, Pensions & Investments).
Real estate managers are taking longer to invest the money they have collected from institutional investors. They are holding back and waiting for distress and inefficiencies in the market, which create conditions in which they thrive, Mr. Koster said.
Michael K. McMenomy, global head of investor services, CB Richard Ellis Investors LLC, Los Angeles, acknowledged 2004 was a time to sell real estate. "Fundamentally, it has been one extraordinary seller's market," Mr. McMenomy said. The firm's U.S. institutional tax-exempt assets dropped 2% to $4.9 billion.
"Once they realize the gains, it was much more difficult to put money back into the marketplace," Mr. McMenomy said. For example, open-end core funds in 2004 had between $5 billion to $8 billion waiting to be invested.
However, both Mr. McMenomy and Mr. Koster believe real estate managers will start spending their cash this year. "I believe there will be a significant number of transactions this year," Mr. Koster said.
Morgan Stanley was also a net seller in 2004, said Alyson D'Ambrisi, vice president, Morgan Stanley, U.S. real estate investing division.
"After stabilizing a number of assets we advised our clients to take advantage of the positive capital market environment and monetize their investments," Ms. D'Ambrisi said. "We are currently redeploying capital and actively making new property investments."
As for REITs, 2004 saw about $7 billion directed to real estate securities, said NAREIT's Mr. Grupe. An increased number of REIT initial public offerings added to the equity in the REIT industry, he said; 29 REIT initial public offerings raised $7.98 billion.
What's more, investors increasingly see REITs as a surrogate for direct real estate, according to a November 2004 Global Real Estate Survey by UBS Ltd.'s investment research arm.
As for buyout and venture capital, investors stung by the technology bubble didn't feel quite recovered from the experience until 2004, said Callan's Mr. Robertson. The first quarter of 2004 was the first increase in fund raising — $85 billion was raised from $44 billion in 2003, he said
At the same time, venture capital fund raising doubled to $20 billion but represented only 18% of the capital raised in the overall private equity market, he said. Historically, one-third of the money raised is for venture capital funds, Mr. Robertson said. But the decrease can be explained by venture capital firms raising much smaller funds.
"Buyout is flaming hot," Mr. Robertson said. In 2004, investors committed $46 billion overall to buyout funds, and buyout managers invested $137 billion in 773 deals, he noted. With few corporations going on buying sprees to poach other companies in their industries, buyout firms have been taking some of their money out through refinancing using cheap debt that is still plentiful, he said. This leads to investors getting back a third to half of their investments' starting value in 2004.