New Mountain raises oversubscribed net lease fund

New York-based alternatives manager New Mountain Capital has raised $825 million against a target of $750 million for its second net lease fund, New Mountain Net Lease Fund II, PERE has learned.

The firm raised $725 million of third-party commitments from both new and old investors including pension funds, insurance companies, endowments, family offices and high-net-worth individuals. New Mountain also committed $100 million to the fund.

New Mountain has made sizable GP commitments to both of its net lease funds. With its first net lease fund in 2019, the firm raised $533 million against a $300 million target. That equity haul included just over $82 million of its own capital, Teddy Kaplan, managing director and head of New Mountain’s net lease business, said.

“We’ve always been the biggest eaters of our own cooking,” Kaplan said. “We as a firm are just tremendous believers in the strategy.”

There are two misconceptions about how net lease performs, Kaplan said. The first misconception is around rent escalations. Many investors believe in a high inflationary environment that it is better to have shorter-term leases and capture some of the rent growth. Kaplan contends that although a net lease property is occupied over a long period, the landlord can also benefit from rent increases. He notes that the market now allows for 20-year contracts with 3 percent escalators built in, up from 2 percent previously.

“There’s not an economic indicator out there that we’re heading into a 20-year, 3 percent compounded CPI cycle,” Kaplan said. “On just a pure math basis, one should take that trade all day long.”

The other misconception is around costs. The properties New Mountain invests in are pure triple net lease, meaning the tenants pay all of the rising costs in the current inflationary environment.

An owner only taking rent on a gross basis is seeing the building’s costs increase at a similar rate to its net operating income growth, Kaplan said. The owner will also pay higher re-tenanting costs with shorter-term leases, he added.

“If we can grow leases at 3 percent, on a pure NOI basis, we’re keeping in line with inflation a lot more than people think relative to other strategies that also suffer from the effects of inflation on the cost side,” Kaplan said.

Target industries and sectors

New Mountain launched its net lease strategy in 2016, focusing primarily on sale-leaseback transactions.

The firm targets industries of which it has a “deep understanding” from its private equity business. These include life sciences, food and beverage, consumer packaged goods and specialty chemicals. The firm also involves its PE team on its net lease deals, something that Kaplan believes is a differentiator in the space.

The manager’s entire net lease portfolio currently is industrial, with around 50 percent of that made up of light manufacturing facilities. The remainder is a mix of specialized manufacturing, cold storage and some industrial outdoor storage facilities. Conversely, New Mountain will not invest in office or retail, as neither are believed to be mission critical to businesses, Kaplan said.

“Our whole alpha is selecting great businesses and industry verticals that New Mountain understands really, really well,” Kaplan said.