Opportunistic Dominates and Distressed Had its Weakest Year Ever.
It probably won’t surprise anyone that private real estate funds had a terrible fund raising year. The drop from 2021 to 2022 was the largest since the Global Financial Crisis and so we’re paying close attention. Perhaps more interesting is that while capital raised and the number of funds both dropped by more than 50%, the style mix continued a trend with opportunistic funds rising near all-time highs from a percentage basis and distressed funds had their weakest fundraising year on record. Intuition may suggest that opportunistic and distressed assets should be highly correlated as they are the two more aggressive forms of private real estate investing.
There is little correlation historically however. Investors see the interest rate environment and want to be prepared for a downturn in pricing, but the coming downturn is not yet broad or deep enough to attract distressed buyers. We believe that day is coming after aggressive borrowing and risky valuation work over the last several years has left many pockets of pain.