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Investors turning away from private equity real estate assets

Los Angeles

INSTITUTIONAL investors are starting to turn away from private equity real estate and infrastructure investments in favour of liquid funds that put their money to work faster, according to the head of Cohen & Steers Inc.

"That's a first," said Robert Steers, whose firm oversees about US$63 billion in mutual funds and other liquid vehicles focusing on real estate, infrastructure and commodities. Shares of the firm have risen more than 21 per cent over the 12 months through April 18, the biggest gainer in a Bloomberg index of asset managers.

Private equity firms are driving up the cost of deals as they raise money faster than they can spend it, stockpiling a record US$1.26 trillion in undeployed capital as at March. About US$500 billion of the dry powder was raised for real estate and infrastructure projects.

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The earnings gap between public and private funds has been narrowing as a result of all the money pouring in, Mr Steers, who co-founded the firm, said in an interview. Rather than wait to deploy their capital in private funds, institutions are moving to mutual funds and other public vehicles that offer exposure to similar assets, Mr Steers said.

"As dry powder piles up, inevitably that creates a floor or a support level for listed real estate companies," he said.

He cited a prominent German institution, which has historically invested only in closely held real estate and infrastructure. It will disclose a mandate in about two weeks of approximately US$500 million to Cohen & Steers, part of a multi-billion-dollar allocation to asset management firms.

Mr Steers said Middle Eastern institutional investors are also allocating more to public funds because private equity returns are narrowing.

While waiting for their money to be called by private equity funds, investors typically hold the cash in liquid assets such as stock index funds, according to David Fann, chief executive officer of TorreyCove Capital Partners, a private equity consulting firm.

Real estate investment trusts, which comprise most of Cohen & Steers' holdings, can offer plausible liquid substitutes for private equity real estate assets, Mr Fann said, but it's hard to find a similar proxy for private equity buyout funds.

Cohen & Steers had net inflows of US$1 billion in this year's first quarter, the New York-based firm reported on April 18, following US$1.2 billion in net outflows in last year's fourth quarter. After the earnings release, the shares gained 2.3 per cent to close at US$48.28, the highest since June 2007. BLOOMBERG