Newcore closes fifth social infrastructure fund

The UK-focused manager credits the ‘positive social impact’ of its funds and its B Corp status for its largest fundraise yet.

London-headquartered manager Newcore Capital, which focuses exclusively on social infrastructure assets in the UK, has reached a final close on £190 million ($236 million; €219 million) for Newcore Strategic Situations V, PERE can reveal.

The latest fund in Newcore’s closed-end, value-add series is its largest yet. The firm, which manages £500 million in assets, was looking to raise £150 million in equity for the fund, which launched in July last year. Newcore targets a net levered IRR of 13-15 percent per annum for the fund’s investments, and uses leverage up to 30 percent loan-to-value at fund level.

Across its target markets of Greater London and Southeast England, Newcore invests exclusively in property that supports essential services, which encompasses sectors such as education, healthcare, storage, life sciences, waste management and transport. The firm buys vacant properties and refurbishes them, typically executing deals of £2 million to £20 million with equity only, before adding loan facilities once refurbishment has completed and long-lease tenants secured, often with an inflation-linked indexation clause. The NHS is among Newcore’s longstanding tenants.

Newcore’s Llewelyn: society will always need social infrastructure real estate assets

Newcore has certified B Corp status, meaning the company has been verified to meet high standards of social and environmental performance. Considering the benefit to all stakeholders, including local communities, suppliers and the environment, “it’s a whole ecosystem as a business,” CEO Hugo Llewelyn tells PERE. “That, and the positive social impact which we can clearly point to in our funds, really helped us with our fundraising.”

Llewelyn believes the real estate underpinning social infrastructure services in the UK offers a unique investment proposition for ESG-conscious investors. “Because we’re creating the asset, you can measure and capture the positive social impact that you create, which is quite unusual for funds in terms of being able to have a really easy positive social impact measurement system, ie, the amount of new childcare places, the amount of new education, the amount of new clinical healthcare that wasn’t there before.”

For example, Newcore bought a vacant property in Surbiton, southwest London for £12 million through NSS V, which it refurbished and leased to a charity called Wemms Education. The school has the capacity to educate up to 150 special educational needs students.

As far as institutional involvement is concerned, the social infrastructure sector is still a nascent one, given the relatively small size of deals at the asset level. However, Llewelyn says a portfolio of such assets with their long income and positive social impact is an increasingly attractive proposition to large institutional investors. He posits that late 2019, when Newcore closed its fourth fund on £84 million, was a “sort of watershed” moment for interest in social infrastructure real estate, as pricing for traditional assets such as offices and logistics became inflated off the back of excess demand.

The evolution of the investor base in each fund in Newcore’s value-add series demonstrates this growing interest. Llewelyn explains that Newcore’s first three funds were “proof of concept” and comprised private or friends and family investors. The fourth fund, however, was the first to attract institutional clients. Two of those were the Merseyside and Clwyd local government pension schemes, which subsequently backed the fifth fund – the former with a commitment of £15 million.

Special educational needs school in Surbiton, UK: bought for £12m and refurbished by Newcore through NSS V

The latest vehicle also attracted a number of institutional investors that were new to the firm, including a large European multi-manager and a FTSE 100 pension fund, which each committed around £50 million.

Llewelyn says investor interest in NSS V took off when macroeconomic risks began compounding in Europe, namely Russia’s invasion of Ukraine, the energy price crisis, inflation and the fire sale of UK government gilts toward the end of 2022. Social infrastructure property offered a safe haven, he says. “Society will keep needing these assets, regardless if consumer expenditure reduces through economic cycles.”

So far, around £80 million of the fund’s £350 million of leveraged firepower has been deployed, in assets leased to special educational needs, childcare and medical research. Most recently, however, the firm entered a new subsector through its purchase of a mortuary, which it leased to Dignity, the UK funeral services provider. “There’s an undersupply of that slightly morbid use, but one which makes a very good investment proposition,” says Llewelyn of the deal. “You can’t do it on the internet.”