Execution style

For its final tally this week, Brookfield Asset Management collected a total of $4.4 billion for its first global real estate opportunity fund, Brookfield Strategic Real Estate Partners (BSREP) – an impressive feat in a tough fundraising environment. However, as the firm now looks to invest all of that equity, it may have some trouble adhering to the fund’s investment parameters.

Under documents from limited partners such as the Pennsylvania Public School Employees’ Retirement System, Brookfield plans to deploy approximately 70 percent of the fund’s capital in large-scale platform investments. The remainder will go to mid-cap property transactions.

Company expectations, as PERE understands, are to invest about half of the fund’s platform investment allocation and 80 percent of the equity for mid-cap deals in the US. This would amount to the firm spending approximately 60 percent of the fund’s total equity in the country.

Knowing that Brookfield has excelled at entity-level investments, it’s no surprise that the firm plans to allocate the lion’s share of BSREP’s capital to such investments. Indeed, the recapitalizations of Olympia & York and General Growth Properties are among the firm’s best-known examples.

Yet, investing 35 percent – or more than $1.5 billion – of the fund in platform transactions in the US may be a tall order. In an interview with PERE earlier this year, Brookfield acknowledged that opportunities for distressed platform investments in the US have become more limited compared to a few years ago, as large transactions in America have benefitted from an increase in liquidity. Instead, the firm noted that it actively is targeting distressed platforms in Europe.

Of course, Europe has been threatened by greater liquidity challenges, which have left platforms that were overleveraged or located in tertiary markets without sufficient capital to continue their operations. Such a situation may force some of these businesses to sell themselves to a buyer like Brookfield. That said, such investment opportunities are relatively scarce even in Europe.

For the transactions it has made on behalf of BSREP thus far, Brookfield hasn’t entirely adhered to the fund's stated investment strategy. Since the asset manager began investing the fund’s capital about a year ago, it has deployed $1.1 billion. Most of it went into three large-scale platforms, including one in the US, one in Australia and, most recently, in Europe with the takeover of logistics developer EZW Gazeley.

Brookfield, of course, still has another $3.3 billion of BSREP capital to go. In addition, the investment targets outlined in LP documents are best viewed as estimates or guidelines, so the firm has some flexibility with how it pursues opportunities.  

Still, when a general partner has as much real estate equity at its disposal as Brookfield, how it actually delivers on its strategy will be the subject of much scrutiny. A look at this early stage shows some discrepancies, but the firm certainly has time to work out the math. However, given the investment parameters that Brookfield has set for its new fund, the equation may be a particularly challenging one to solve.

It could end up doing more deals outside the US than it originally planned.