Boston Capital raises second US fund ahead of ‘capital disruption’

The Boston-based manager, which has exclusively raised overseas capital to date, expects to add US investors with its next capital raise.

Boston Capital Real Estate Partners has raised $300 million for its second value-add US-focused residential fund, Boston Capital Income and Value US Apartment Fund II, and plans to gather up to $100 million in co-investment capital, PERE has learned.

The Boston-based firm caters to non-US investors via a Luxembourg-domiciled vehicle. After first attracting capital via non-US separate accounts, Boston Capital raised $140 million for its inaugural fund in the series in 2018.

Boston Capital launched the second fund in early 2020 and extended the fundraising period by a year because of covid-related challenges, managing partner Mark Dunne told PERE. Around half of the investors in Fund II were new to the fund series, with all but one existing investor returning to Fund II, he said.

All of Fund II’s investors – which comprise pension funds, foundations and other institutions – are non-US, he added. The firm expects to add US investors during the next fundraise, which is slated to begin later this year. Adding US investors is a “natural evolution” for the business, Dunne said.

Mark Dunne in front of trees
Boston Capital’s Dunne: Poised for capital disruption

Around half the capital from the fund has already been invested, with most of the deployment happening in 2021. Because of the market dislocation and pullback by lenders, Boston Capital only struck one deal, for a 208-unit property in Kansas City in 2022.

The remaining capital, coupled with the co-investment capital Boston Capital expects to raise, puts the firm in a good position to take advantage of upcoming dislocation, Dunne noted.

“We’re prepared for some capital disruption,” Dunne said. “While apartment fundamentals are solid, people may be overleveraged, people may have capital calls, they may have interest rate cap re-ups they cannot meet. We’re really optimistic about where the opportunities are going to be.”

Boston Capital invests primarily in suburban, Class B apartments in primary and secondary markets. The firm has invested in Atlanta, Raleigh and Kansas City in the current fund.

The firm targets net returns in the 16 percent range, with maximum leverage of 60 percent, Dunne said. Boston Capital generates its higher returns through a combination of factors, such as making unit renovations while maintaining an average of 90 percent occupancy. This ensures that its properties remain income-generating even while they are being upgraded. The firm also renovates the common areas to help enhance the value and increase the rental rates of its assets.

The firm has already returned 100 percent of its first fund’s capital despite having only sold half of the assets in the vehicle.

“We like to say we have core-plus risk with opportunistic returns,” Dunne said.

JLL acted as placement agent for the fund.