Fortress to close on its largest US, Japan RE funds – Exclusive

Fortress Investment Group has held first closes for its largest-ever US and Japan real estate funds, PERE has learned.

The New York-based investment manager raised an aggregate of $2.8 billion for Fortress Japan Opportunity Fund IV and Fortress Real Estate Opportunity Fund III. PERE understands that FJOF IV attracted just under $1.5 billion, beating its $1.25 billion target, while FROF III drew $1.3 billion, approaching its $1.5 billion equity goal. Fortress declined to comment.

Fortress is expected to close on $300 million-$350 million in additional capital over the next couple of months, which would bring the total equity haul from the two funds to more than $3 billion, according to one source familiar with the matter. Already FJOF IV and FROF III are Fortress’s largest-ever real estate funds, and are projected to hit their $1.5 billion and $1.75 billion hard-caps at final close.

The two vehicles represent the first real estate capital raises since Fortress was acquired by SoftBank. Fortress is understood to have made a GP co-investment amounting to 3 percent of the fund’s capital, with half of the equity coming from Fortress employees.

But while many parent companies typically invest directly in funds of acquired asset managers, this is viewed as unlikely for SoftBank, which has invested almost exclusively in technology companies since its inception. The purchase of Fortress was one notable exception, and it has been reported that an agreement with CFIUS effectively prohibits SoftBank from involvement in the day to day operations of Fortress.

Both funds were said to have been launched in January, as the investment periods for their predecessor vehicles were expected to end within a month of each other. Seven major investors in FJOF IV and FROF III committed to both funds, each of which had an 80 percent re-up rate from existing investors.

Both also saw sizable support from Japanese institutional investors, which accounted for 25-30 percent of the capital raised in the Japan fund and 10 percent of the US fund, the source said. The remainder of the equity in the vehicles came from US institutional investors and global sovereign wealth funds, among others.

Fortress earlier had gathered $1.1 billion for FJOF III in November 2015 and closed FJOF II and FJOF I at their hard-caps of $1.47 billion in December 2012 and $871 million in June 2010, respectively. The firm previously hit its $1 billion hard-cap for FREOF II in June 2015 and raised approximately $625 million in commitments for the first fund in the series.

Fortress is said to size its funds based on the opportunity it sees in the market and has consistently turned money away. All of the firm’s real estate funds, including the latest two at final close, are understood to have hit their hard-caps and in the case of the FJOF funds, have been substantially oversubscribed. This has led the firm’s funds platform to grow at a slower rate than some of its peers.

Fortress’s FJOF series, which has traditionally focused on distressed debt opportunities in Japan, has more recently targeted the acquisition of large property portfolios from the Japanese government and corporations, particularly in the country’s hospitality sector. One of the firm’s most recent real estate deals in the country, through FJOF III, was the 2017 acquisition of 106,000 apartments from the Japanese government in what is known as the JEED transaction.

Fortress also pursues distressed property deals through the FROF series, either by buying debt with a view of taking over the asset or acquiring assets from creditors, which in Europe tend to be European banks and in the US are often legacy CMBS transactions. FROF IV is projected to have a 25 percent allocation to Europe, up from 10 percent with the previous funds in the series.

To date, Fortress has made 140 investments comprising an aggregate $4.2 billion in deployed capital across the FJOF and FROF series. Since inception, the funds are said to have generated an overall gross return of 40.4 percent and gross multiple of 2.6x and a net return of 29.5 percent and net multiple of 2.1x.