LCN Capital Partners has raised more than $1.35 billion in aggregate equity for its third pair of sale-leaseback funds, with both vehicles exceeding their targets.
LCN closed LCN North American Fund III on $635 million, raising $135 million more than its original target, while LCN European Fund III corralled €600 million against a €500 million target. This is the largest fundraising effort for the firm. The predecessor vehicles – LCN North American Fund II and LCN European Fund II – closed in 2017 with approximately $750 million in total capital commitments.
According to the firm, 100 percent of the investors in the firm’s second North American and European funds re-upped with LCN Funds III. The LP base includes pension funds, insurance companies, foundations as well as family offices and high-net-worth individuals across nine countries.
Despite the strong investor endorsement, some institutions have found the firm’s funds difficult to categorize from an allocation perspective. Edward LaPuma, the firm’s co-founder and managing partner, told PERE that while the majority of its investors have classified the funds’ strategy as real estate, there are others that “have a hard time determining which bucket to place us in.”
“Our investing partners have invested from their real estate, fixed income, private equity and even an inflation or hedge bucket,” he said. “Some pension plans that could benefit from our highly cash-generative investment, especially during a market where interest rates are at all-time lows, cannot figure out where to put us. We have a market-agnostic niche that as a result of its hybrid nature produces high risk-adjusted returns. Perhaps this is because it doesn’t fit neatly into any specific bucket.”
The funds’ investment approach uses a hybrid strategy of originating and structuring primary market sale-leaseback and build-to-suit investments directly with corporate owner-occupants across all industry sectors and commercial property types in North America and Europe.
“The credit-based leases negotiated, coupled with the security of corporate real estate ownership, create an investment that produces inflation-protected quarterly distributions. The assets are also insulated from the mark-to-market volatility that public market participation and other direct real estate ownership often experience,” according to a company statement explaining the funds’ strategy.
PERE understands the firm is targeting around 12 percent plus gross returns from these funds. LCN North American Fund III and LCN European Fund III are both close to being 50 percent deployed in various property types, including grocery and convenience retail assets.
Given the focus on producing long-term, secure cashflows, LaPuma believes the funds’ strategy is more akin to a typical real estate core fund: “We are not an opportunistic investor. We are a core investor that produces high current cash-on-cash returns. The market typically defines core investments by the asset’s location. We define core by the predictability of the revenue stream and the resulting quarterly distributions. Predictable returns should be the building block of any investment portfolio.”
LaPuma says a sale leaseback property might not be in a core market like New York, for example, but it will still classify as a core asset if it has a 20-year-lease.
And the pandemic has only fueled the demand for such transactions.
“A lot of companies invest in real estate without thinking too much about it. They finance it, forget about it, and it is often the largest line item on their balance sheet,” he said. “As covid-19 has forced companies to consider alternative ways of generating liquidity, the instances of sale-leaseback transactions are growing.”
Headquartered in New York, LCN Capital Partners has assets under management of more than $5 billion across its three US dollar-denominated funds and three euro-denominated funds.