Friday Letter To dip or not to dip

A long-time New York real estate operator is pondering the launch of its first commingled investment fund. The wisdom of testing new waters during the current fundraising environment, however, is debatable.

PERE heard this week that L&L Holding is looking to dip its toes in the fundraising waters. Although L&L is keeping mum about the subject, rumour has it that the New York-based property firm is in early talks with potential LPs about raising approximately $500 million in equity. The debut fund would be focused on the acquisition of New York office properties, an area the firm knows very well.

Given the rise in requirements by the market’s largest institutional investors to be positioned closer to operational – not allocation – expertise, it is understandable that many real estate operating companies are considering dipping their toes in the fundraising waters. Still, is it a smart idea for any firm with no prior experience raising institutional capital to launch a fund right now?

Let’s examine the prospects for the success of L&L.

Despite L&L’s intention to move forward with its maiden fund, this isn’t necessarily the best time to be getting into the pooled investment business. Capital is scarce, experienced fund managers are struggling and investors are skittish about committing to new vehicles. Even veteran fundraisers like Westbrook Partners and The Blackstone Group are offering more generous incentives to attract LP capital and reach fundraising targets. L&L, meanwhile, doesn’t have experience raising and investing institutional capital.

What it lacks in fundraising experience, however, L&L makes up in active, hands-on real estate knowledge. As a property manager, L&L has a solid track record and stellar reputation. Last year, the firm’s co-founders, Robert Lapidus and David Levinson, made it on the Commercial Observer’s list of the “100 Most Powerful People in New York Real Estate.” The firm’s 5 million-square-foot portfolio includes ownership stakes in such well-known properties as 200 Fifth Avenue, 222 Broadway and 600 Third Avenue.

Another factor in L&L’s favour is a history of partnerships with groups that do have experience raising, managing and deploying institutional capital. Often entering into joint ventures as a minority partner, L&L has teamed up with industry heavyweights that include BlackRock, The Carlyle Group, Morgan Stanley Real Estate Investing, Prudential Real Estate Investors, JPMorgan Asset Management and Beacon Capital Partners, among others.

Furthermore, L&L would not likely bite off more than it can chew with its fund. By looking to acquire only New York office properties, the firm is keeping its strategy tight and focused and well within its knowledge base. That is a plus for a lot of investors, which have been burnt by poor returns in prior vintage funds where the manager enjoyed overly flexible mandates.

As nervous as investors are about committing to inexperienced fund managers, capital-raising precedents already have been set by experienced operators, regardless of their fund management inexperience. Witness The Related Companies’ first opportunistic real estate fund attracting $825 million in commitments earlier this year—10 percent above its original $750 million target. In another example, Exeter Property Group closed on $615 million in equity for its second US industrial fund. Both are among the larger fundraises completed by any groups in the private real estate space this year.

There is no doubt that times are tough for fundraising. However, based on recent examples of operators getting into the game, L&L’s prospects look good should it proceed with its maiden fund.