Chevy Chase, Maryland-based Artemis Real Estate Partners closed its largest-ever fund this week, raising $2.2 billion in capital commitments for its fourth value-added flagship fund, Artemis Real Estate Partners Fund IV, against an initial target of $1.5 billion.
The oversubscribed raise came down to the firm’s track record, Deborah Harmon, co-chief executive at Artemis, told PERE. Since inception, Artemis has realized over 70 percent of the 171 investments made across its first three funds. Those realized investments have generated a net internal rate of return of 23 percent, against a target of 14-15 percent.
“The fundraise is attributed to our realized investment performance and the long-term track record of that performance,” Harmon said.
Artemis pursues a “bread and butter” value-add strategy, where performance is driven more by the business plan than the leverage, co-CEO Alex Gilbert said. Artemis has achieved its target-beating returns to date using an average loan-to-value of 49 percent, Harmon noted.
Over half of the capital came from new investors, including domestic institutions via “significant support” from new consultants, Harmon said. The firm also raised sovereign wealth capital from Asian and Middle Eastern investors for the first time, Harmon said. Around 25 percent of Fund IV’s capital came from outside the US.
Another driver of Artemis’s fundraising success is its senior team. The firm operates a co-head system with all senior roles at the firm. Both Harmon and Gilbert operate as co-CEOs. The firm has two co-presidents, Richard Banjo and Anar Chudgar, with Banjo also acting as Fund IV co-portfolio manager alongside Michael Vu.
The structure is by design, Harmon said. Multiple voices help promote diversity of experience and backgrounds, Harmon said, but it helps with retaining investors too.
“We [wanted to] eliminate as much operating risk as we could from day one,” Harmon said. “We felt that the best way to do that was to eliminate key person risk.”
Plans for deployment
The firm now has over $3 billion of dry powder to deploy, having closed on $1 billion of commitments for its Healthcare Fund II last year. The firm deployed 5 percent of the fund capital in 2022, limiting the deployment in anticipation of a market downturn.
Artemis will look for both debt and equity investments with Fund IV, Gilbert said. The current market opportunity is in debt investments, namely mezzanine debt, preferred equity and joint venture equity, as well as the purchase of non-performing loans. Artemis made the majority of the last investments in its third fund in debt and expects to make most of the initial investments in Fund IV in debt.
“It’s made the most sense in the capital stack to be in that [debt] position,” Gilbert said.
The firm believes the pullback of balance sheet lenders will create opportunities for alternative managers like Artemis to provide financing to developers seeking to retain control and sponsors looking to recapitalize through rescue financing. The firm also sees opportunities to generate subordinate debt on urban infill developments. It has seen debt opportunities in its pipeline increase by about a third from that of the previous fund in the series.
Artemis is aiming to build a diversified portfolio for Fund IV. The firm has been overweight to well-performing sectors like multifamily and industrial in recent years, Gilbert said. In terms of markets, the firm will target those where job growth is still occurring.
However, Artemis expects the market opportunity will soon begin to shift to the equity side as more pricing adjustments occur. “As pricing does correct, we would expect to be doing a lot more equity,” Gilbert said.
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