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Oak Street captures $500m for third fund – Exclusive

The Chicago, Illinois-based private equity real estate firm blew past the target for the latest offering in its net-lease strategy.

Oak Street Real Estate Capital has held a final close on its latest real estate fund, Oak Street Real Estate Capital Fund III, collecting a total of $515 million in equity, including $500 million for the vehicle itself and $15 million in co-investment capital.

Oak Street far exceeded the original $300 million target for its latest fund, which is nearly three times larger than its predecessor, Fund II. That vehicle, which closed in 2012, had a total equity haul of approximately $175 million, including $116 million for the fund plus additional capital raised through other structures.

The firm held a first close of $70 million on Fund III, which had a $400 million hard cap, in October 2014, according to a filing with the US Securities and Exchange Commission. Limited partners – the majority of which were public pension plans – include the Illinois Municipal Retirement Fund, which earmarked up to $25 million to the fund last May and the Illinois State Board of Investment, which pledged up to $30 million in August. More than 90 percent of Fund II's investors made follow-on commitments to Fund III.

With its net lease strategy, Oak Street acquires single-tenant buildings with triple-net leases, where the tenant is responsible for paying the property's taxes, insurance and maintenance costs in exchange for a lower rental rate. To date, the firm has invested or committed 50 percent of the capital in Fund III, including the sale-leaseback of a five-building portfolio in five states from MetLife Real Estate Investors for $210 million in December. Oak Street, which typically targets net returns of more than 12 percent for its investments, has fully harvested its first fund and sold eight of the 17 investments in Fund II.

“The [net-lease real estate] sector is gaining more attention with institutional investors that remain focused on income-producing assets in their real estate allocation,” said Marc Zahr, chief executive officer and managing partner at Oak Street. “The sector will continue to gain credibility with groups that want income and less risk.”

Zahr added that one of the firm's investment criteria is to not buy below a capitalization rate of 7 percent. Typically, Oak Street is able to achieve this by buying a property below what comparable assets are trading in the marketplace and creating value before it closes on a transaction, such as converting a four-year lease to a 15-year lease or rewriting a gross lease agreement into a net-lease agreement, he said.

In addition to its net lease strategy, Oak Street also has a real estate emerging managers strategy, for which it currently manages separate accounts for public pension plans such as the Employees Retirement System of Texas.