You know there are opportunities to be had in real estate when the likes of hedge fund manager John Paulson gets involved.
The founder of Paulson & Co has revealed to investors that the firm is setting up a private equity real estate vehicle, the Paulson Real Estate Recovery Fund, targeting residential land development and other distressed real estate.
According to an investor letter, the firm has hired former Lehman Brothers Real Estate managing director Mike Barr as portfolio manager to oversee the fund, and teamed up with former DR Horton executive Tom Noon.
Given the continued downward pressure on housing process and lack of capital in the real estate sector, there will be numerous investment opportunities going forward.
The partnership with Noon – who was former western region chief operating officer for the US homebuilder – suggests the Paulson fund will concentrate its efforts on residential property owners at risk of default.
“Investing near the trough of this cycle should provide superior risk adjusted returns while providing an inflation hedge and low correlation with other asset classes,” Paulson said in the letter.
“Given the continued downward pressure on housing process and lack of capital in the real estate sector, there will be numerous investment opportunities going forward,” he added.
Noon will help Barr source and manage residential investments for the Paulson funds. Barr joined Lehman Brothers in 2001 having worked previously for New York-based Westbrook Partners and Merrill Lynch's real estate investment banking group. Barr will also be joined by former Lehman Brothers Real Estate vice president Jonathan Shumaker.
Documents for the fund have already been filed with the US Securities and Exchange Commission.
Although a cap on the fundraising has not been decided, it is expected that the initial size of the fund will be a couple of hundred million dollars, with the life of the fund around seven years. Investments will be made in both residential and commercial property sectors, according to the New York Times.
Paulson founded his hedge fund in 1994, with just himself, an assistant and $2 million of cash. Today, the firm has around $29 billion in assets. Its focus in the first half of 2009 will be on long distressed opportunities such as mortgages, bankruptcy debt, distressed situations and capital restructurings.
“We remain bearish on the outlook for the US economy and believe that the recession will extend into late 2009 and likely into 2010,” Paulson concluded in the investor letter. “While the US stimulus package will likely cushion the decline we don't think it can halt the downturn, and will likely have longer term negative consequences.”