Kayne Anderson Real Estate closed its latest and biggest ever real estate fund, driven in part by institutional investor demand for alternative real estate.

The firm, whose real estate arm is led by Al Rabil, closed the fund at its $1.8 billion hard-cap after nearly two years in market. Kayne Anderson Real Estate Partners V was launched in September 2016 with a first close in April 2017. The fund raised almost twice as much as its predecessor, KAREP IV, which closed on more than $1 billion in 2015. The significant increase is the result of new institutional investors that have committed to the fund and have shown interest in the fund’s targeted niche real estate sectors as they look to diversify real estate holdings.

Rabil: investing in niche property types

Global investment volume in alternative real estate – which includes student housing, laboratories, data centers and cold storage – has been rising steadily, accounting for a record 6.2 percent of the total commercial real estate market in 2016, according to JLL’s 2017 Global Capital Markets Research report. The rise in demand for alternative investments is primarily driven by institutional investors that have shown preference for diversifying real estate holdings through alternative sectors in established markets rather than pursuing geographic expansions, JLL reported.

Investors in KAREP V included the Texas Permanent School Fund, Arkansas Teacher Retirement System, Employees’ Retirement System of the State of Hawaii and City of Manchester Employees’ Contributory Retirement System. The fund’s limited partner composition skewed more heavily toward institutional investors, which made up more than two-thirds of the capital in the fund. By comparison, institutional investors accounted for 50 percent of KAREP IV, sources said. The shift is part of Kayne Anderson’s conscious effort to diversify its investor base to include those that have fewer capital restraints and can continue to grow their commitments over time.

Following previous fund strategies, KAREP V will seek opportunities in alternative real estate driven by strong demographic inflows such as senior housing, medical office buildings and student housing. With a focus on maintaining heavy cashflow that would help to counter any unfavorable macroeconomic factors, much of the returns will be based on income rather than property appreciation. Kayne Anderson has currently deployed more than 20 percent of the fund’s capital.

KAREP V, anticipated to be fully committed in 18 months, has a gross return target of 20 percent or more, in line with the performance of Kayne Anderson’s previous real estate fund, which have consistently exceeded their 20 percent target, sources said.

Kayne Anderson did not use a placement agent.

Kayne Anderson Real Estate, the private equity real estate arm of Kayne Anderson Capital Advisors currently has a portfolio of more than 12 million square feet of medical office space, approximately 10,500 senior housing units and 4,500 student housing beds.