The La Jolla, California-based consultant and investment manager has committed $300 million to the firm. The $300 million will be divided equally between a recapitalization of a 1,500-unit apartment portfolio, a fund and co-investment commitment, and a development joint venture focusing on high-growth markets in the US, ACRE managing partner Michael Van Der Poel told PERE exclusively. The multi-pronged investment was a first for ACRE.
“We basically tailor made a pretty complicated, bespoke structure to fit exactly what we set out to achieve with them,” he said.
The recapitalization is of a portfolio consisting of assets in ACRE’s prior fund, ACRE Equity Fund III. ACRE opted for a recapitalization as the time approached for the firm to exit its investments from the fund but the business plans for the assets had not been fully executed. “We really thought we had a lot of value left in them,” Van Der Poel said.
The recap also served as a useful entry point for discussions between ACRE and StepStone on the latter’s commitment. The existing assets gave StepStone something tangible to underwrite as opposed to theoretical future investments, he said.
“We were able to get a strong sense for how they underwrote and managed their investments over a period of years when we dug in on our due diligence on the existing assets in the recapitalization piece of our investment,” Jeff Giller, partner and head of real estate for StepStone, noted.
Once the discussions were started, both parties were keen to do more. Giller noted that the structure allowed for StepStone to invest via all three of its primary modes of investment: fund investments, secondaries transactions and programmatic JVs. For ACRE, it added a further institutional investor to its client suite, which included existing relationships with Hamilton Lane, OPTrust and Almanac Realty Investors, the private real estate arm of Neuberger Berman.
The fund investment and subsequent co-investment capital will allow ACRE to do more investing over the next 6-12 months in ACRE Multifamily Fund IV. ACRE is still raising the fund and declined to comment on its target or how much it has raised. The firm was a net seller during the pandemic but senses the tide is turning for participants on the sidelines.
“The next six and maybe 12 months is going to be a great buying opportunity for seasoned veterans that are capitalized and ready to pounce,” Van Der Poel said.
That opportunity is primarily in development, he added. Fund IV has around a 30 percent cap on development, he said, and the firm has 12 developments in its pipeline across various strategies. However, he declined to say how many of the 12 were in Fund IV and if the fund was close to its development cap. The co-investment capital from StepStone is being used for additional development deals that could cause the latest fund to go over the cap.
“Having StepStone come alongside allows us to alleviate some of that cap to continue to participate in what we are seeing as probably the best gross return investments we’ve seen in a long time,” Van Der Poel said.
ACRE is set to use both the fund and co-investment capital, as well as the $100 million or so earmarked for new investments through the JV, to double down on markets where it has a successful track record, he said. The firm primarily targets multifamily in the Sunbelt and the Midwest, including Tampa, Orlando, Jacksonville, the Carolinas, Austin, Houston and Dallas. The firm is exploring an expansion into certain new markets, including Cleveland and St Louis, Van Der Poel said.
The manager has also expanded its risk appetite beyond its original thesis. Formerly a value-added multifamily equity manager, the firm has since raised a credit fund, ACRE Credit I, originating first mortgage bridge loans, mezzanine loans and preferred equity. In its series of equity funds, it has broadened to invest in more opportunistic and stabilized properties as well as development, all of which are options for the new capital earmarked for StepStone’s investment in ACRE Multifamily Fund IV, Van Der Poel said.
ACRE is hoping that the commitment will represent the start of a long-term relationship with StepStone, with additional capital to come. That capital could come directly from StepStone or a new relationship that ACRE could access through StepStone’s huge client base that includes some of the world’s largest investors.
“It gives us the ongoing relationship with a firm like this but also a stepping stone to their primary business where we can hopefully get to know and get access over time to their advisory clients,” Van Der Poel said.