Big value in big retail

As it closes its fifth fund, private equity real estate firm Lubert-Adler has found value in the ground beneath distressed retail outlets.

Private equity real estate fund manager Lubert-Adler recently closed its fifth fund on $1.7 billion (€1.4 billion). The vehicle, which was reportedly oversubscribed, will continue the firm's time-tested strategy—looking for value in opportunistic property plays across the real estate spectrum, including the office, industrial, residential, hotel and resort sectors in the US and, to a lesser extent, Canada.

It's a strategy that is resonating with investors. “They've really concentrated on value-add and opportunistic real estate in niche areas and [are] finding value where others haven't,” says Peter Gilbert, chief investment officer at the $26.6 billion Pennsylvania State Employees Retirement System (SERS).

The pension fund announced last month that it had committed $30 million to Lubert-Adler Real Estate Find V. It is SERS' fourth commitment with the firm; the first was a $25 million investment in the firm's vintage-1998 fund. Gilbert said he has been impressed with Lubert-Adler's distressed plays, hotel and resort investments and urban conversion projects, in addition to the firm's more traditional investment strategies.

Recently, the Philadelphia-based private equity real estate firm has been in the news for its high-profile retail deals. In January, the firm was part of the consortium that acquired the Albertson's grocery store chain for $17.4 billion. In that transaction, Lubert-Adler teamed up with New York-based hedge fund Cerberus Capital Management and a number of real estate groups—including Klaff Realty, Kimco Realty and Schottenstein Realty—for a collection of 655 supermarkets in the Western US and Florida. The CVS drug store chain and grocer Supervalu also participated in the deal, acquiring the company's drugstores and 1,100 supermarkets, respectively.

Lubert-Adler has been involved with other highprofile retail transactions, particularly as the distressed-retail play has become increasingly popular. The firm worked with Boca Raton-based turnaround shop Sun Capital Partners—as well as Cerberus and Klaff—on the $1.2 billion acquisition of the Mervyn's chain in 2004. The trio also won the bidding war late last fall for the Green Bay, Wisconsin-based discounter ShopKo. In the past, Lubert-Adler has also participated in transactions for troubled Kmart, Service Merchandise and Montgomery Ward outlets.