New York-based Madison International Realty has received a commitment from a global sovereign wealth fund to launch a targeted strategy focused on providing US mid-market real estate firms – those with around $500 million to $1.5 billion in assets under management – with growth capital in a market suffering from constrained liquidity.
To date, Madison has completed 14 growth capital investments across various funds, totaling $1.5 billion of invested equity. The firm is currently in the market with its eighth fund in that series, Madison International Real Estate Liquidity Fund VIII, which is targeting $1.5 billion.
Madison declined to disclose the exact amount of the commitment from the SWF, but it is in the hundreds of millions, Ron Dickerman, president and founder, told PERE. Specifics on future fundraising were also not disclosed. Dickerman added Madison may eventually raise “multiple pockets of capital” for the strategy.
The commitment formally establishes a dedicated platform that will focus on providing growth capital alongside Madison’s real estate secondaries business, which targets capital partner replacements, equity monetization, recapitalizations and public company investments. The firm sees an opportunity in a liquidity constrained market in which “even the giant firms are struggling to raise money from global investors,” Dickerman said.
Smaller firms have also had more difficulty accessing institutional capital, and Madison sees an opportunity to expand its existing business to fill that gap.
“We’re really using all the same tools and sourcing strategies and structuring elements that we have historically, but [the dedicated platform] is a direct reflection of the needs of our counterparties in the market today,” Dickerman said.
Deployment plan
Madison has not yet deployed the SWF capital but has three investments in its pipeline, including one that is expected to close in the next 30 to 60 days. Dickerman said the firm expects to make between four and six investments for the growth capital strategy in the next 12 months, deploying around $1 billion in equity in total.
An example of a growth capital investment that Madison has made thus far is the approximately $100 million investment in 2022 in a multifamily firm whose existing investors were looking for an exit from a venture. Although the capital partner replacement represented a traditional secondaries deal, the firm also acquired a co-GP interest in the venture and provided capital for further investments in properties as part of the transaction. The acquisition of the co-GP interest is not a typical transaction for Madison, but allows the firm to participate in the GP cashflows, Dickerman said.
The firm’s current pipeline for this strategy includes investments in a single-family rental firm – the deal expected to close within the next 60 days – as well as a multifamily mortgage provider and medical office firm. Madison is also targeting firms with expertise in traditional multifamily, industrial, cold storage, self-storage, data centers, life sciences and senior housing. It will avoid office- and retail-focused strategies, Dickerman said, having not invested in either property type in at least four years.
The platform will be overseen by Kenny Moon, managing director, who joined the firm in late 2021 from Irvine, California-based ValueRock Realty Partners. He had previously worked at Almanac Realty Investors, a specialist manager focused on providing similar types of growth capital.
“[Moon] is a seasoned veteran of this business and is very active in contacting counterparties,” Dickerman said. “He’s been receiving inbounds for quite a long time from a lot of counterparties that are looking for this this type of capital.”
Madison plans to hold investments in this strategy between five and seven years, Dickerman said. The firm is seeing opportunities where it can embed a definitive exit, meaning Madison can trigger a sale of underlying properties it has an ownership interest in at a specific time, he added.
Madison is also targeting slightly higher returns for the new strategy than it does in its flagship vehicle series. For this strategy, its return target is in the mid-teens, versus in the low teens for its flagship fund series. The higher return target reflects the higher-risk profile of the investments but also market changes in return expectations.
“That’s been one of the byproducts of rising interest rates, the risk-free rate on treasuries is 4 or 5 percent. High-yield corporates are 7, 8 percent,” Dickerman said. “The general view is required rates of return on real estate have been rising.”
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