Harrison Street Real Estate Capital is looking to invest in more development projects for its fourth fund by offering a co-investment vehicle alongside it. Harrison Street Real Estate Partners (HSREP) IV Co-Investment is targeting $150 million in equity commitments, with a $175 million hard cap, for development transactions with its fourth fund on a pari passu basis.
According to documents from the San Francisco Employees Retirement System (SFERS), which committed $50 million to the vehicle at its February meeting, HSREP IV Co-Investment will target an 18 percent net IRR and a 1.8x net equity multiple. The co-investment fund is anticipating a $100 million first close by the end of the first quarter on commitments from such HSREP IV limited partners as SFERS, Liberty Mutual Insurance and Perella Weinberg. Harrison Street also will make an investment of at least $2 million in the fund.
Because HSREP IV has a diversification limit of 30 percent for development projects, Harrison Street will use the co-investment fund to provide greater diversification for investors without changing the investment limitations of the main fund. The Chicago-based real estate investment firm has identified a pipeline of 12 development deals consisting of 24 assets for the co-investment fund across its targeted niches of student housing, senior housing, medical office and self-storage. The current pipeline has a potential development cost of more than $800 million, requiring more than $200 million of equity. The majority of the projects are likely to be in senior and student housing, according to the SFERS documents.
In a memo to the SFERS board, The Townsend Group expressed some concerns about the commitment, stating that a “$50 million allocation brings with it a number of risks,” including significant exposure to a single manager and the increased exposure to development of specialty property types in a single vintage year. The consultant suggested that SFERS reduce the commitment to $25 million, but the pension plan followed its original plan and made a $50 million investment, representing one-third of HSREP IV Co-Investment’s target size.
Harrison Street closed HSREP IV in July after spending just a little more than six months on the fundraising trail. The fund brought in a total of $750 million in commitments, exceeding its original equity target of $600 million as well as its original hard cap of $700 million. As of September 30, HSREP IV had invested or committed $169 million, or 23 percent of its total fund commitments, across 21 investments. Approximately 28 percent of that amount has been allocated to development projects.