Patience pays off, even in a pandemic

This week, Kayne Anderson Capital Advisory closed a $1.3 billion fund just two weeks after launching it. The feat is a testament to the credit market disruption wrought by the covid-19 pandemic, as well as the strong appetites among institutional investors for real estate debt.

It also speaks to the discipline of the Los Angeles-based firm. Prologue to this fundraise is a history of prudent capital formation. During the past two years, as credit spreads tightened, Kayne opted to shrink its fund sizes rather than risk subpar returns or rely on financial engineering. For its second debt fund, which closed on $1.5 billion in 2017, the firm released $300 million back to investors; the following year, it closed its third debt vehicle on $1 billion when it could have raised twice as much.

Instead of taking on more capital than it could responsibly deploy, Kayne put prospective commitments on hold. Andrew Smith, co-portfolio manager of Kayne’s debt platform, told PERE that meant many conversations in which he assured investors that “when the time is right, we’re going to be able to take advantage of opportunities in scale and we’ll need to quickly raise capital.”

That moment came last month when the viral outbreak brought the commercial real estate market to a near standstill. Kayne deployed the final $250 million of its Real Estate Debt Fund III to swallow up high-quality securitized debt at discounted prices as cash-strapped REITs and hedge funds clamored for liquidity.

Aware that March’s fire sales were likely to be the first of many distress-driven opportunities in a post-covid world, Kayne moved to assemble a fresh pool of capital. It called on investors that had sought to commit more capital to Real Estate Debt III, as well as those that were turned away outright. In the end, roughly one-third of its committed capital came from first-time investors.

Kayne Anderson’s wait-and-see strategy stands in contrast to efforts by other managers to time the market. During the past three years, multibillion-dollar funds have occupied a greater share of the private real estate fund universe, as mega-managers built large war chests for the next downturn. Other firms created rainy day vehicles or incorporated special terms into their fund documents to access capital quickly should opportunities arise. Now that the next great dislocation seems to be upon us, Kayne Anderson’s latest fundraise provides an alternative model of downturn preparation, one built on patience, planning and communication, rather than hefty fundraising totals.

PERE has tracked 35 other fund launches since March 15. It is unclear if any were crafted specifically to capitalize on the current market disruption, but three of those vehicles have closed, albeit on much smaller totals – the largest among them is $21 million – than Kayne. Still, the competition chasing distressed opportunities is mounting.

Undoubtedly, Kayne’s position as a debt manager worked to its advantage amid this credit crisis. Investors would have, of course, been less exuberant about a hospitality or retail focused fund. But the longer major markets remain locked down, the more widespread the dislocation is likely to become. And, as Kayne’s fundraise shows, it is never too soon to start making calls.