Despite routinely outperforming their more experienced counterparts, emerging real estate fund managers are having a difficult time closing deals in a market where investors are exercising caution amid uncertainty over how long the current positive economic cycle can run.

Last year had the lowest number of emerging funds closed than any other time in the last decade, according to a report from London-based research firm Preqin. Emerging fund managers, defined as those raising their first or second fund, only raised $11B last year (the lowest since the height of the financial collapse in 2009) compared to $30B in 2007. The dip is often attributed to uncertainty.

“Everyone has a mixed view of where the market is right now,” said Andrew Moylan, Preqin's head of real estate products. “Pricing is high as a result of increased competition, which makes it quite a difficult market. Nobody is expecting a massive correction or crash but there is a little bit of nervousness.”

Institutional investors today most value a firm’s lengthy track record when selecting a private real estate fund manager, according to the report. These priorities have led to a sharp decline in share of investors open to putting money into a fund run by emerging managers: from 72% in 2009 to 36% in 2017. While the number is up from its all-time low of 34% in 2015, Moylan said this is not indicative of a rebound.

“Fundamentally, I think the market is going to remain tough,” he said. “The asset class has evolved into more managers with track records and added competition. I wouldn’t expect a big return.”

Investors who do choose to go with emerging managers stand to benefit. Emerging managers have outperformed their experienced counterparts every year since 2004, but these returns stem from higher-risk investing, according to the report.

“It is a variation of the best and the worst,” Moylan said. “If you can pick the good ones, it’s a smart strategy.”

There are avenues for emerging managers to beat their experienced counterparts in landing a deal. Customized solutions and flexibility with fee structures along with some demonstrable prior experience are ways newer managers can trump a more established firm. Honing in on a specialty in a particular sector is another path to success for newer fund managers, as it is difficult to stand out against larger firms when operating as a catch-all for investment types and regions, Moylan said.

Larger institutions with a bigger investment staff and resources to conduct due diligence on less experienced managers are more likely to invest with newer funds, as they see the benefits that come with the risk. Sophisticated investors within these companies have internal resources to go with emerging managers.

Cornerstone investors like pension funds, insurance companies and endowment plans are buoying emerging funds toward their goals. The New Jersey State Investment Council public pension fund made a $100M commitment to the Focus Healthcare Partners Fund I. The investment accounted for 40% of the emerging fund’s targeted $250M.

“If you can get one big firm to make a reasonably sizable commitment, you are well on your way in the fundraising process and prove your own viability,” Moylan said.