Lubert-Adler Partners is marketing a new opportunistic real estate fund, Lubert-Adler Fund VII, with a target size of $500 million and a hard cap of $850 million, according to documents from the Texas Municipal Retirement System (TMRS), which committed $75 million to the fund at its board meeting last week. A first closing is anticipated in June, with a final closing expected in May 2014.
Fund VII will focus on investing in middle-market retail, multifamily, hotel and industrial assets exclusively in the US through joint ventures with operating partners. Through the vehicle, Lubert-Adler plans to acquire assets at significant discounts via note purchases from lenders and servicers, real estate owned situations, borrower recapitalizations and bankruptcy proceedings, according to the TMRS documents. Typically, such assets will require value-add upgrades through renovations, repositionings, re-leasing or rebranding, with the expectation that the properties will generate current yields of 10 percent to 12 percent.
Lubert-Adler has changed the strategy from that of its previous vehicles, Funds IV and V, which pursued larger deals, second-home developments and resort properties. Such funds have failed to perform at or near target internal rates of return (IRRs) and currently are generating negative IRRs, the TMRS documents noted. Fund VII is targeting a gross IRR of 20 percent and a net IRR of 18 percent.
Fund VII is Lubert-Adler’s first real estate offering since raising approximately $550 million for two co-investment vehicles in 2010 and 2011, alongside Fund VI, which gathered more than $2 billion in commitments in 2008.
Founding investors in Fund VII – of which TMRS is one – will receive management fee breaks, consisting of a 1.25 percent fee on the total commitment during the commitment period and 1 percent of the total equity in unsold assets after the commitment period.
Fund VII was one of three real estate funds to which TMRS committed a total of $250 million last week, as part of its 2013 real estate implementation plan to allocate up to $200 million to new value-added and opportunistic real estate investments and up to $300 million to new core strategies. In all three funds – which also include Invesco Real Estate’s Invesco US Core Income Fund and Abacus Capital Group’s AbaCore I – the $20.4 billion pension plan was a founding investor and received a meaningful fee break.