FEATURE: Capital building – tales from the fundraising trail

Whether it’s down to a history of smart buys or smart sales, investors in 2009 looked to fund managers’ track record before committing to real estate vehicles. Jonathan Brasse, Zoe Hughes and Robin Marriott spoke to three GPs about their recent fund closes to discover the secrets of their success. PERE Magazine, April 2010 issue.

Fundraising has been a fickle beast over the past few years. From private equity real estate fund managers securing a record-breaking $85.2 billion of investor commitments in 2007 for value-added and opportunistic strategies, to just a handful of GPs closing a scattering of vehicles last year with total commitments amounting to little more than $30 billion, capital raising has proved a tumultuous activity for all concerned.

PERE took a look at the challenges that faced – and are still facing – managers on the global fundraising trail, and asks what is likely to change tomorrow. A research paper by Zurich-based asset management and advisory firm Strategic Capital Management shows LPs have already pushed their fund sponsors on numerous terms, not least management fees and the waterfall provision. In predicting where terms and conditions could change in the future, SCM notes that limited partners will toughen the language relating to key man provisions, GP co-investment and no fault removal clauses.

Before marching forward though, it’s important to take a look at where the industry has just come from. Speaking to three fund managers in the US, Europe and Asia who closed commingled real estate funds, PERE provides an insight into how some firms succeeded where so many others had failed.

Of course there are nuances in the success stories of our three examples, which include The JBG Companies’ JBG Fund VII, Orion Capital Managers’ Orion European Real Estate Fund III and CLSA Capital Partners’ Fudo Capital II. But of the commonalities between the three funds, a track record of wise investment judgments was a leading factor in attracting repeat and new commitments. Whether it was wise buying, in the case of JBG, or wise selling, in the cases of Orion and CLSA, the ability to get the timing right has proved to be of paramount importance to investors.

And when it comes to get the timing right, private equity real estate professionals of all shapes and sizes should look no further than Capital Pursuits. Intended to lighten the day of any investor relations executive or actual investor, this PERE-devised board game will have you battling against your colleagues in a global search for those ever-elusive dollar commitments.

Orion European
Real Estate Fund III

Partners at the pan-European firm managed to corral €1bn by themselves, but then turned to a third party for a top-up.

Van Stults, partner at Orion Capital Managers, says one has to go “further and wider” than ever before in the art of fundraising. This is because “20 is the new 200”. As Stults points out, investors that might once have committed €200 million to a fund are now more likely to deliberate over just €20 million.

There may be a lot of equity out there, but there is not a lot of big equity

Van Stults

“In the old days you could go out and get commitments for €200 million or maybe €300 million, but the bite sizes are a lot smaller than they used to be. The doors of the giant investors are pretty well closed, or people are simply just writing smaller cheques. There may be a lot of equity out there, but there is not a lot of big equity,” he said.

Orion finally closed Orion European Real Estate Fund III on €1.28 billion in December 2009 having begun the process of capital raising during the credit crunch. The firm was one of those few European private equity real estate players often cited for having “gotten their timing right”, being a net seller of assets in 2006 and 2007.

However, even being a net seller doesn’t make fundraising any easier or less time consuming, not least when you factor in the write-downs being suffered by LPs and the onerous due diligence that investors began to carry out.

Orion’s founding partners Stults, Bruce Bossom and Aref Lahham were still winning commitments in 2008 and 2009, but reaching the fund’s target size within the designated timeframe proved difficult.
Stults explains that having achieved commitments for the majority of the fund, it had effectively run out of contacts. At this point, for the first time in its history, Orion decided to call in third party capital raisers to top-up the equity.

The decision to appoint Credit Suisse Real Estate Private Fund Group helped Orion raise an additional €300 million. Credit Suisse scoured its investor contacts and saw that Orion had a gap in its investor profile – Australia and New Zealand.

In the end the investor profile for Orion’s Fund III looks like this: around 40 percent of the LPs are from the US, between 20 percent and 30 percent are from Europe, while the remainder are from other regions – Australia and New Zealand included.

Fudo Capital II

CLSA defied the fundraising capitulation post Lehman Brothers, holding a large first closing the day the bank went under

John Pattar, managing director of CLSA Capital Partners’ Fudo real estate funds, suggests omens don’t come much better than a $500 million first closing on the same day that Lehman Brothers bank collapsed.

Recalling that fateful night in September 2008, Patter says: “It was a massive vote of confidence as people were well aware of the warning lights.”

 After achieving gross realised IRRs of 80 percent and an equity multiple of about 2x for realised investments for the platform’s first fund, the $430 million Fudo Capital, Pattar and his team corralled enough confidence from their investor pool of North American and European investors to fend off the widespread investor attrition that was starting to ravage the fundraising market.

 From that Lehman-defying start, the pan-Asia Fudo II fund closed on $816 million in November 2009, having garnered commitments from more than 20 investors.

 Pattar points to parent group CLSA’s long-established and extensive Asia network as a major factor behind achieving such traction. “CLSA is an Asia-focused house,” he says. “There is an unknown price you pay for intelligence and knowledge of the market. We benefitted from that.”

 Pattar, who set up the real estate platform in 2004 after joining from Australia’s Lend Lease, says the firm’s “forward looking” research – CLSA has a research team of more than 150 people – helped make savvy early investments and exits, such as in Singapore and Taipei. Referencing sales in these two countries in 2007, he says: “I don’t believe we exited too early though some of our rivals may have thought so.”

There is an unkown price you pay for intelligence and knowledge of the market. We benefitted from that

John Pattar

 Pattar admits even CLSA Capital Partners’ impressive start wasn’t going to make fundraising easy after the Lehman collapse so, after the first closing of Fudo II, the platform’s marketing continued softly until March 2009. During that time, Pattar witnessed an increase in the number of meetings requested by investors. “Two meetings had become five or six,” he says. In addition to more information about the platform itself, CLSA Capital Partners was asked for more intelligence on the other LPs. “That could have been tricky but because every investor had re-upped from fund one that made it pretty easy.”

While the existing investors had re-upped, Credit Suisse Real Estate Private Fund Group was enrolled to attract new investors. This proved a successful hire as the fund eventually held its final closing in November ensuring Fudo Capital II was one of a small handful of funds to do so in a practically eventless 2009.


Closing its seventh fund on $576.5m, JBG says part of its success was seeding the vehicle with early deals.   
Since raising its first real estate fund in 1999, The JBG Companies has traditionally closed its fundraising activities within the course of one year. Sometimes raising a fund took just six months. JBG’s seventh property vehicle, JBG Fund VII, took slightly longer this time round, with fundraising wrapping up in around 20 months.

The Chevy Chase, Maryland-based firm first launched Fund VII in the summer of 2008, just months before the bankruptcy of Lehman Brothers and the general disintegration of global credit markets. As the firm’s managing director for investment management, Matt Kelly, remembers: “In this market we obviously had a different experience from past fundraising cycles.”

The longer fundraise was an experience repeated for all private equity real estate firms out fundraising in the past two years. Yet, despite the cataclysmic events of September 2008, JBG – which targets equity and debt investments in the Washington DC, Maryland and Virginia areas – was able to hold a first close on approximately $200 million in November 2008 with commitments from existing high-net-worth investors and one larger institutional player.

“The credit crisis had a profound impact on people’s timing,” Kelly explains. For JBG, which did not use a placement agent, that meant many investors asked the firm to “keep talking. Many of them said they were interested in our story and that we could count on them for something in the last closing, but that they didn’t know how much they could commit.”

Charitable foundations are not adverse to taking advantage of dislocations in economic cycles

Matt Kelly

One factor that helped JBG secure hard commitments following the first close, was the firm’s ability to close nine investments in 2009 – some of which were earmarked for Fund VII. Deploying $77.5 million of the fund’s equity, Kelly says investors were given “something specific they could underwrite. It made a discretionary fund that much less discretionary from the investor’s perspective, in a manner of speaking.”

Like its predecessor vehicle, high-net-worths represented around a third of Fund VII’s investor make-up, with institutional investors making up the remaining two-thirds. The majority of Fund VII investors are US individuals and institutions.

For Kelly, one difference this time round was the emergence of charitable foundations. Comparing the investment group to US endowments and foundations, the managing director says, they are a good fit for opportunity funds like JBG, not least because they like to take the “contrarian view. Charitable foundations are not averse to taking advantage of dislocations in economic cycles and they have been setting themselves up so they have the capacity to do just that. Many of them view this as the perfect time to get into the US real estate market.”