Covenant closes 9th US apartment fund with $395m – Exclusive

Targeting value-add investments throughout the southeastern US, the firm had its most successful round of fundraising to date.

Covenant Capital Group has closed its ninth fund targeting US multifamily assets with a capitalization of $395 million, PERE understands.

Covenant Apartment Fund IX is the most popular yet for the Nashville-based manager, surpassing its target of $300 million and outraising its predecessor by 52 percent. As with its previous eight funds, Covenant will focus on value-add investments in apartment communities in the Midwestern, southeastern and Mid-Atlantic regions of the US.

The vehicle is the first launched by the firm in the past decade that has met fundraising expectations, according to PERE research and analytics. Funds VI, VII and VIII each failed to reach their $300 million goals.

However, the group, managed by co-founders Govan White and Rick Scarola, has attracted steadily more capital with each venture, raising $140 million for Fund VI in 2008, $236 million for Fund VII in 2011 and $260 million for Fund VIII in 2015.

White attributes the strong support for Fund IX to Covenant’s track record in the value-add multifamily space. In total, 58 percent of the fund’s capital came from repeat investors.

“The increased fund size is a testament to our apartment-focused, value-add investment strategy, as well as the demonstrated ability of our team to execute,” White said. “We look forward to deploying this capital to revitalize properties acquired through Fund IX into premier, institutional-quality assets.”

Fund V and Fund VI have been liquidated and reported net internal rates of return of 3 percent and 14 percent, respectively, according to September meeting minutes from the state of Connecticut’s Investment Advisory Council, which committed $50 million to Fund IX. Fund VIII reported a net IRR of 16 percent, as of 30 June.

Covenant declined to comment on the return figures.

Fund IX investors include public and private retirement systems, foundations, endowments and private investors, with more than 87 percent coming from domestic sources and the remainder coming from overseas.

Already, the fund has acquired five apartment communities and has committed to five more. Covenant plans to invest upwards of $1.2 billion, factoring in property-level leverage, into between 25 and 30 assets during the next three years.

With Fund VIII, which closed in December 2015, Covenant bought 19 apartment communities ranging from 114 units on Nashville’s west side to a 464-apartment complex in Lakeland, Florida. Fund VII netted 23 assets, three of which housed more than 500 units.

Since 2001, Covenant has purchased more than 170 multifamily assets, many of them in off-market transactions. Most of its acquisitions have been in growing markets throughout the southeastern US, including Florida, Tennessee, Kentucky, Georgia, North Carolina and South Carolina. Its investments have an aggregate value of $2.2 billion, White said.

Specifically, the firm targets supply-constrained markets and assets with mild flaws that can be addressed through capital improvements, financial restructuring or market repositioning.

Covenant also prioritizes sustainability in its investments, following guidelines set by both its own Environmental, Social and Governance (ESG) policy and the United Nation’s Principles for Responsible Investment initiative. Many of Covenant’s apartments are aging and in need of operational upgrades to improve energy efficiency. They also prioritize security features.