Investors looking abroad

Investors looking abroad
Private equity investments grow 63% for year and real estate, 29%, largely a result of increased interest in international investments
By Arleen Jacobius

Posted: May 28, 2007, 6:01 AM EST


U.S. institutional investors looked abroad for a greater share of their private equity and real estate investments during 2006, asset managers and consultants say.

Assets of private equity investors grew 63%, to $37.23 billion, with international accounting for 12%, or $4.44 billion, according to data from Pensions & Investments’ annual survey of the largest money managers. That’s double the percentage for year-end 2005, when the private equity managers reported 6% of their $22.85 billion total was invested internationally.

Assets of the largest 25 managers of U.S. institutional tax-exempt assets invested in real estate equity rose 29% to $275.86 billion. International real estate represented $21.5 billion, or 8% of the total, holding roughly steady from the year-earlier survey. Among all managers reporting for the survey, real estate equity rose 25% to $342.68 billion, with international investments also accounting for 8% of that at $27.88 billion.

Consultants and money managers concur that investment overseas is drawing loads of investor interest.

Among private equity managers, international investment is a trend that has been a decade in the making, said Sheryl Schwartz, managing director and head of alternative investments for TIAA-CREF, New York. But managers now are getting more adventurous, moving into emerging regions in Asia as well as Russia and Eastern Europe, she added.

TIAA-CREF has been making 30% to 40% of its private equity commitments outside the U.S. since 1997, Ms. Schwartz said. At year end, TIAA-CREF reported $1.02 billion in private equity for U.S. institutional tax-exempt clients, with $373 million in international.

“Globalization is not only here, but it’s here to stay,” said Sanjay Mansukhani, senior member of Watson Wyatt Worldwide’s private market research team. “Every buyout shop has already trying to go global.”

Asia and Europe are important components of that expansion — so much so that senior executives at some of the largest buyout groups are moving to London, with a few to Tokyo and Hong Kong, to help support the growing business, Mr. Mansukhani said. Venture capital is also becoming international. Not all venture capital managers are opening foreign offices, but all are keeping tabs on how the increasingly global market and economy are affecting the businesses they own, he said.

Global environment

The attraction of international investing to private equity managers is that their portfolio companies are operating in a global environment, Ms. Schwartz said.

“Companies are selling into every market and buying into every market,” she said. “Almost every large company has operations in another country or is sourcing (business) in another country or sells to another country.”

To help and increase the value of companies that operate in foreign countries, private equity firms also have to be abroad, she said.

Among real estate investors, the move abroad is driven in part by a lack of domestic property.

There are not enough domestic properties to meet institutional investors’ demand, said Deborah Jackson, executive managing director of consulting firm Weiser Realty Advisors LLC, New York. Not only are less pricey properties more readily available outside the U.S., but the investment also has the added benefit of diversifying investors’ portfolios with international holdings, Ms. Jackson said.

“You will see a lot more investments throughout the world and outside the U.S. because it is available and returns are pretty good,” she said.

Domestic real estate returns dipped in 2006 to 16.6% from the spectacular 2005 returns of 20.1%, the highest since 1975, according to the NCREIF Property index.

Institutional investors are expecting greater returns for the added risks they are taking investing outside of the U.S., noted Peter Schaff, regional chief executive officer, North America, of LaSalle Investment Management Inc., Chicago.

LaSalle’s equity real estate assets managed for U.S. tax-exempt institutions grew 6.5% to $11.57 billion, according to the current survey. International assets grew 13% to $1.84 billion.

“We’ve seen enormous flows from the U.S. to opportunity funds investing in the Asia-Pacific region,” Mr. Schaff said.

There is also interest in Europe, but real estate markets there are more mature, so investors are not expecting returns as high as from Asia, Mr. Schaff said.

While LaSalle’s business in Asia has “grown extremely fast,” it will not show up in the data until next year’s survey, he said, declining to comment on the figures further.

Within P&I’s manager universe, growth in real estate investment trust assets slowed a bit as of Dec. 31, rising 12% to $71.85 billion, lagging the previous year’s 19% growth. The largest 25 managers of REIT assets accounted for $68.65 billion of that total, an increase of 13% from a year earlier.

REIT investors were on a roller coaster in 2006, but the securities ended the year up 34.4%, according to the FTSE NAREIT All REIT index.

“People look at 2006, they look at absolute performance ignoring the underlying volatility. REITs started out the year strong, had a weak quarter, then rallied,” said Michael Torres, founder of REIT manager Adelante Capital Management, Oakland, Calif.,

Adelante had $3.3 billion under management for U.S. institutional tax-exempt clients at year end, up nearly 24% from $2.7 billion the year before.

Hotels help

Mr. Torres said the addition of hotels to about 10% of the firm’s Total Return Strategy, its flagship strategy, about six months ago helped boost returns. The firm added investment in lodging companies because it is higher risk leading to higher returns, but investment is not “too hot,” he said, adding: “It’s a bit neglected by its natural audience.”

“Institutional investors such as REITs, opportunity funds and pension funds are stepping up foreign investments due primarily to the soaring prices of domestic commercial properties and increased opportunities globally,” said Scott Farb, managing partner in the Los Angeles office of real estate consulting firm Reznick Group PC.

Global REITs offered investors a faster way to add a global component to their real estate portfolio, LaSalle’s Mr. Schaff said. Global REITs are “one of the fastest growing areas” for his firm this year, he said.

Some institutional investors may be choosing to invest with regional real estate money managers rather than those based in the U.S. for their international investments. Others may invest with current managers who have expertise abroad, Weiser’s Ms. Jackson said.