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Colony NorthStar doubles down on retail capital push

The investment manager is merging its retail distribution business with another broker-dealer to allow retail investors to access the firm’s institutional funds.

Colony NorthStar is expanding its access to retail capital with the long-term intent to bring individual investors into its institutional funds through a merger announced on Tuesday.

The investment manager, which declined to comment, is merging its broker-dealer, NorthStar Securities, with another broker-dealer, New York-based S2K Financial Holdings. The deal sees Colony NorthStar taking a majority interest in S2K, which will be rebranded as Colony S2K Holdings. The new business will distribute both broker-dealers’ products, led by Steven Kantor, S2K’s current chief executive.

In the short term, Colony S2K will raise capital for Colony NorthStar’s newer retail-focused products that are structured to avoid industry-wide regulation that has dampened fundraising. Long term, the business will bridge Colony NorthStar’s institutional-focused funds with a growing retail investor base.

The firm’s newer retail-focused products include NorthStar Real Estate Capital Income, an unlisted, closed-end fund registered with the SEC in March. The firm has a $3.2 billion target for the real estate debt-focused vehicle. The firm also expects to raise capital for the NorthStar/Townsend Institutional Real Estate Fund, a vehicle under registration that will operate as a fund of funds, taking positions in deals with other sponsors. That interval fund would be managed in conjunction with Cleveland, Ohio-based multi-manager Townsend Group, which Colony NorthStar agreed to sell in September.

Like the wider market, NorthStar’s legacy retail products have struggled with fundraising. The firm raised $16.7 million in H1 2017, according to research firm Blue Vault Partners, compared with $290 million in all of 2016 and a high of $1.4 billion in 2015.

“An extended period of extraordinary structural change and market disruption, including the very recent Department of Labor fiduciary rule adoption and implementation in June, has negatively impacted the retail investment management business year to date,” Colony NorthStar chief executive Richard Saltzman said on the firm’s second-quarter earnings call. “Despite these industry challenges, we remain optimistic that the retail investor management business will continue to institutionalize and rebound.”

Through the merger, Colony S2K plans to increase retail capital raising for its two new vehicles, structured to fit with the fiduciary rule change. The new company will also enable retail investors to access Colony NorthStar’s institutional funds in the long-term, a source told PERE.

Those vehicles include the Colony NorthStar Industrial Fund, which had more than $1 billion of commitments as of June 30, Saltzman said on the firm’s Q2 earnings call. The firm has also talked about raising a fund for digital real estate infrastructure, which could include a retail capital sleeve, a source said.

Colony NorthStar joins many of its peers expanding in the non-traded REIT space, as more firms seek to corral retail capital. In November, Los Angeles-based CIM Group agreed to acquire Cole Capital, a subsidiary of Phoenix-based VEREIT, which provides access to retail capital and the opportunity to raise more products through Cole’s distribution channels.

Most firms have created the products internally – an expensive and time-consuming process – rather than acquiring an existing platform. Recently, Blackstone launched Blackstone Real Estate Investment Trust in August to raise up to $5 billion; Starwood Capital Group filed a registration form with the Securities and Exchange Commission in October; and TH Real Estate is planning to register a vehicle in the coming months, PERE previously reported.

PERE understands that at least a half-dozen other private equity real estate firms are seriously considering the non-traded REIT market.