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GI Partners raises $500m for first real estate fund

The San Francisco-based private investment firm launched and held a first close on the open-end vehicle earlier this year.

GI Partners ETS fund
3701 Market Street: one of the ETS fund's investments

GI Partners has closed on approximately $500 million to date for its debut commingled real estate fund, GI Real Estate Essential Tech + Science Fund, PERE has learned.

The San Francisco-based private investment firm launched and held a first close on the open-end vehicle in January, and has raised additional capital in subsequent closes from existing and new investors. The ETS fund is being marketed globally, but its limited partners to date include pensions and foundations from North America.

With the new fund, GI Partners will aim to invest in real estate assets that continuously operate to support “mission-critical” functions of the technology and life sciences industries. Targeted assets include data center properties, life sciences labs, and “always on” research and development facilities within the office and industrial sectors.

GI Partners has been investing in such assets since 2012 through core separate accounts, including DataCore with the California State Teachers’ Retirement System and TechCore with the California Public Employees’ Retirement System. However, the firm will be pursuing a core-plus strategy with the ETS Fund, with fund-level leverage at, or up to, 50 percent.

“Core has a wall of money trying to get in,” explained John Sheputis, managing director and head of the ETS Fund. “This pushes down cap rates and drives up basis, and we’re seeing a lot of speculative development on the other end of the spectrum. So the money that’s coming in is on lower terms and a higher basis. You’re taking more risk.

“We wanted to do something in the core-plus space because that’s where we’re seeing better returns.”

Potential core-plus investments would include assets in need of partial lease-up, repositioning or redevelopment. GI Partners declined to discuss return targets for the fund, but core-plus vehicles typically have net return targets ranging from the high-single-digits to the low-to-mid-teens.

Sheputis, who was co-founder and chief executive of Fortune Data Centers and president of Infomart Data Centers, explained the fund’s strategy as follows: “We don’t just look at what an asset is. We look at what it does. Yes, data centers have a lot of power. But the thing that makes them most valuable is the network is always on. No one tolerates the internet going down. The communication aspect of the cloud is persistent. Research goes on around the clock. No one stops looking at tissue cultures [a form of biological research involving animal or plant tissue] at 5pm. Same thing for research at Apple and Microsoft and Amazon. It’s what they do that makes them continuous.”

Geographically, the ETS fund will be focused on the largest markets for technology and life sciences, such as Boston, the Northern Virginia/Philadelphia corridor, the greater San Francisco Bay Area and San Diego. Transactions will typically range from $50 million to $200 million. As of June 30, GI Partners had deployed about 50 percent of the fund’s capital across five acquisitions and expects to continue that pace of investment.

The vehicle’s assets to date total more than 800,000 square feet. They include Walsh-Bowers Assemblage, a portfolio of two data centers in Santa Clara, California, which is the primary data center hub for Silicon Valley; Mt Eden Research Park, a six-building life sciences campus in the San Francisco Bay area; and 3701 Market Street, a purpose-built lab and R&D facility in Philadelphia.

Sheputis added that GI Partners will seek buildings with a weighted average lease term of three to seven years, where the firm considers its money to be competitive. “If the lease term is too short and it’s in a conversion area, you’ll see it get bid up by the developers,” he noted. “If the lease terms are too long, you might attract net lease buyers and they might bid it up because they’re starved for yield.”

GI Partners Real Estate currently manages approximately $13 billion of assets across two lines of business. The bulk of the assets are in its indirect real estate business, through which the firm acquires interests in operating companies on behalf of institutional investors. With its direct business, which is focused exclusively on tech and science, GI manages approximately $3.5 billion in gross assets through its core accounts, as well as around $500 million in commitments with the ETS fund.

In addition to real estate, GI Partners has a private equity business, focusing on North American mid-market companies, and a data infrastructure business. In June, the firm closed on $3.9 billion for its latest private equity fund, GI Partners Fund VI. Last September, it raised a total of $1.8 billion for its debut data infrastructure fund.