Over the past seven years, Pacific Investment Management Company (PIMCO) has come from close to nowhere in opportunistic real estate to emerge as a force. With eight funds raised, $15 billion under management and a team of 29, the firm has built a formidable private equity real estate business. This week, its latest fund, Bank Recapitalization and Value Opportunities (BRAVO) II, closed on $5.5 billion to invest in residential and commercial real estate in the US and Europe – enough cash to participate in all kinds of deals, including the very big ones.
PIMCO's move into the real estate spotlight coincided with a big push into alternatives, and that push is far from over despite recent upheaval at the firm triggered by the shocking resignation of chief investment officer Mohamed El-Erian in January. El-Erian played a significant part in a diversification strategy away from the California firm's core strength – bond funds. Unfortunately for PIMCO, since his departure, there have been several embarrassing articles about the firm and, in particular, simmering tensions at the top of the organization.
Still, the firm's new chief executive Doug Hodge recently reiterated that alternatives and, by definition, real estate will continue to be a key part of its diversification strategy. So, there is no reason to suppose that PIMCO’s property investing will slow down. That is, provided the firm’s performance figures continue to stack up.
PIMCO’s first real estate fund, Distressed Mortgage Fund I, was launched amid the Lehman Brothers meltdown and delivered a measly 9 percent IRR against a 15 percent target. Subsequent funds, however, have fared considerably better.
Distressed Mortgage II generated an IRR of about 35 percent net, while TALF, named after the US Federal Reserve's Term Asset-Backed Securities Loan Facility, generated 34 percent, according to sources familiar with the firm. A fun-sounding vehicle called DISCO – Distressed Senior Credit Opportunities – and targeting IRRs in the high single digits made 11 percent. DISCO II still is open, but it has returned 24 percent net so far against a 10 percent target, those sources noted.
Also in the mix is BRAVO I. That fund, which raised $2.35 billion, is about to divest and is showing a 28 percent return, sources said. Finally, there is a Tactical Opportunities fund, which is returning 16 percent since being started one year ago.
It was on the back of this track record that PIMCO was able to garner the $5.5 billion in commitments for the mega fund that is the new BRAVO II. The trick, as always, will be to invest this money well. Assuming the firm continues on a roll and the market opportunity remains as large as it believes, PIMCO should be here to stay in private real estate investing, regardless of whatever is happening at the board level.