Cross Lake Partners, the longtime real estate arm of hedge fund Paulson & Co., is positioning itself for a fresh start following a split from its troubled former parent.
The private equity real estate firm will run independently and take possession of Paulson’s approximately $1 billion existing property portfolio. Cross Lake will continue to manage the hedge fund’s two existing real estate funds on behalf of institutional investors, and John Paulson, founder of Paulson & Co, will continue to be an investor. The firm will make direct and indirect real estate investments in addition to pursuing joint ventures with operating partners.
Led by managing partners Michael Barr and Jonathan Shumaker, the New York-based firm consists of the entire Paulson real estate team of 11-50 employees. Shumaker owns a 25-50 percent interest in Cross Lake while Barr owns 50-70 percent interest, according to an IAPD filing with the Securities and Exchange Commission.
Both Cross Lake and Paulson declined to comment, but PERE understands that Cross Lake opted for independence from Paulson. While Cross Lake will continue to maintain its existing investor base, it believes that independence from Paulson may also attract a new group of investors that like independent firms purely focused on real estate, according to one industry source. Additionally, the firm may be able to raise capital more easily by establishing itself as a standalone private equity firm that still has the experience of a team that has worked together in the industry for a decade, the source said.
The two funds currently being managed by Cross Lake, Paulson’s Real Estate Recovery Fund and Paulson Real Estate Fund II, launched in 2009 and 2013, respectively. The funds focus on opportunistic investments and target a return of 20 percent for their diversified investor base, which includes institutional investors like pension funds including the Contra Costa County Employees Retirement Association and sovereign wealth funds. Previously, the real estate team acquired distressed properties including assets from the Extended Stay Hotels chain and the CNL Resorts portfolio.
The team closed Fund I at approximately $320 million in 2010 and Fund II at its hard-cap of $450 million in 2013. The funds struck single asset deals and acquired real estate portfolios across the US. In addition to the four main property types, Paulson’s real estate team also targeted investments in residential real estate, hospitality, land and homebuilding.
Cross Lake intends to expand its team from the original Paulson real estate investment members. The firm will likely raise a new fund and continue its opportunistic strategy, given that its IAPD filing includes details on fund formation. PERE understands Cross Lake is likely to raise a fund and is not looking for a joint venture at this stage. All existing and future Cross Lake funds will be independent of Paulson going forward. Future investment targets include single assets, portfolios, entity-level and debt securities within the US for residential and commercial properties, according to its IAPD filing.
The spin-out is said to be favorable for both parties, positioning Cross Lake for growth and helping Paulson to refocus after years of poor performance. Paulson released a statement earlier in the year announcing that it was “rightsizing the firm” to focus on its “core expertise in areas that are growing.” The hedge fund, founded in 1994 by John Paulson, rose to prominence by making profitable bets on credit derivatives during the US housing crisis, but the firm has faced poor returns in recent years. Paulson’s assets have lost approximately 68 percent in value since 2011, plunging from a high of $38 billion as reported by Reuters to just $12.5 billion as of June 2018, according to PERE data.