Crosstree raises the largest UK-focused fund of the year

The London-based manager makes both equity and debt investments out of its special situations fund series.

London-based Crosstree Real Estate Partners has reached a final close for its third and largest fund, Crosstree Real Estate Special Situations Fund III, on £481 million ($607.4 million; €562.5 million), PERE can reveal.

The total capital raised puts the fund in fourth position among the largest funds closed so far this year with a sole focus on Europe, per PERE data. The manager exceeded its £450 million target size for the fund, and raised an additional £74 million of co-investment capital for the fund’s first two investments, plus a further £45 million in capital via a dedicated sidecar.

Crosstree focuses exclusively on Greater London for its diversified real estate investments, making Fund III the largest solely UK-focused fund closed so far this year, and the fourth largest since the beginning of 2021, PERE data shows.

Crosstree was founded in 2011 by former Starwood Capital executive Sean Arnold and former Blackstone principal Nick Lyle in partnership with B-Flexion, the private investment firm managing the family office of Swiss-Italian pharmaceuticals billionaire Ernesto Bertarelli. Crosstree manages over £2 billion in gross asset value.

One Nine Elms, London: Crosstree provided £100 million junior loan as part of £650 million recap last year

Fund III is the firm’s second commingled fundraise, following the closure of Crosstree Real Estate Special Situations Fund II on £358 million in 2019. The manager’s first vehicle, Crosstree Fund I, exclusively invested with B-Flexion, at a size of £400 million.

Crosstree’s strategy blends value-add and opportunistic equity acquisitions with subordinated debt financing opportunities, explained Arnold. “Fund II was 75 percent equity and 25 percent subordinated debt investments. In Fund III, these debt investments will probably be a slightly higher percentage, more like 35-40 percent, given the opportunity set right now emerging from funding gaps in subordinated debt and preferred equity.”

The firm targets a 15 percent net IRR from its latest fund, with a target net investment multiple of at least 1.5x. The prior fund in the series was approximately one-third exposed to living sectors, a third to hospitality and a third to more traditional sectors such as urban logistics. Arnold said the opportunistic strategy moves between sectors, but he expects Fund III to be similar in terms of sector scope.

Fund III is approximately 25 percent deployed. Investments so far include a participation in the recapitalization of the One Nine Elms mixed-use residential and hospitality project in London in June 2022. Apollo Global Management provided senior financing, and Crosstree provided junior financing together with the Carlyle Group. The deal plugged a £650 million gap that allowed China-based developer R&F Properties to resume work on the project after it stalled earlier that year. It is expected to complete in Q1 2024.

The Collective Canary Wharf: co-living asset bought by Crosstree from a consortium of lenders

“Although our strategy has been to raise mid-sized funds, we are happy to target larger investments like Nine Elms given we have a collection of high-quality investors that can scale up and co-invest alongside us,” said Lyle of Crosstree’s £100 million junior loan investment in the project. The firm added four new investors into this fundraise, including its first sovereign wealth fund and first Asia-based investor. B-Flexion remains the largest investor.

The second investment made through the fund was the purchase of a 705-unit residential tower in London’s Canary Wharf business district from the creditors of The Collective, a UK co-living company that went into corporate administration in 2021. Crosstree paid approximately £185 million for the Collective Canary Wharf in October 2022, and plans to improve operations and stabilize the purpose-built co-living asset after a period of lender control.

In terms of the current pipeline for the fund, Lyle said he is seeing more opportunities on the debt side than the equity side. “As you would expect in an environment like this, there is a bit of a stand-off between buyers and sellers,” he said. “As a consequence of that, we’re very much focused on the situations where people need to need to transact, and where we can help fill funding gaps.”