Cottonwood Group, a Los Angeles-headquartered real estate investment manager with $3 billion in AUM, has held the first close for its debut US open-end fund that will straddle both equity and debt investments across property sectors.
Last week, the firm raised around $200 million for the Cottonwood Real Estate Founders Fund. Two Asian financial institutions are understood to have anchored this initial capital raise, with the rest coming from other ultra-high-net-worth investors as well as Cottonwood’s own GP co-investment.
The vehicle is structured as an open-end fund with a minimum lock-up period of three years. The firm is targeting a total of $750 million in the fund’s next closing round.
Cottonwood has been investing through separate accounts and co-investment vehicles since the firm was launched in 2012. Its move into fund management comes with a uniquely structured product that can be deployed across the capital stack.
“The fund is essentially combining a hedge fund concept with real estate as an asset class, allowing us to take advantage of the best access point in any given deal,” said Alexander Shing, the firm’s founder and chief executive. “We can either place debt and invest in first mortgage debt, for example, or take an equity position in a transaction.”
According to Tinchuck Ng, managing director and head of investments, the fund, as a result, would be “sector and capital style agnostic.” Given the current market conditions, she said a good portion of the fund’s capital would be deployed in debt deals, while the equity investments would target develop-to-own or distressed opportunities. In terms of sectors, the firm would pursue deals in mixed-use, residential, logistics and offices.
The vehicle is different than most conventional property funds that focus on either equity or debt strategies, even though they might be sector agnostic. Shing agrees having such an open-end fund with an absolute return mandate has taken a little longer to explain to investors.
“With pension funds, foundations and endowments, there is always the bucket issue,” he said, referring to the pool of capital investors use from their portfolio to commit to a specific strategy. “All of them have an absolute return bucket as well as a real estate allocation, but sometimes they have a rigid structure in terms of debt and equity [investments].”
One undisclosed institutional investor that has agreed to invest in the second closing, for example, has chosen to use its broader alternatives bucket to make the commitment, Shing noted. He also added that the firm would set up sector- or strategy-focused separate accounts or sidecars to work in tandem with the main fund to help the more “traditional private real estate investors” to address the allocation challenge.
The firm is also targeting other types of investors that might have fewer constraints.
“The financial and banking institutions and ultra-high-net-worth investors do not tend to have this issue,” Shing added. “For HNIs, it is all about having the personal relationship. And the financial institutions often have the liberty to either invest from their balance sheet, or use their distribution capabilities, take the position and distribute some of that in the form of other products to their own clients.”
Cottonwood is targeting 12 to 15 percent gross annual returns from the fund. There will be a 6 percent distribution made per annum to the investors, which will have the option to either take the distribution or roll it back into the fund.