AMERICAS NEWS: Mercury rising for Kennedy Wilson

The capital raising markets are a tough place for everyone right now, not least the Beverly Hills real estate investment firm Kennedy Wilson.

Just 11 months after PERE revealed Kennedy Wilson was in the process of raising its third private equity real estate vehicle targeting $1.25 billion, the firm has said it is being bought out by the special purpose acquisition company Prospect Acquisition Corp.

The deal has been billed by Kennedy Wilson chairman and chief executive officer William McMorrow as a means of injecting capital into the firm at a time when distressed real estate opportunities are “unprecedented”.

Although no financial figures were available, Prospect could pump $198 million of cash into Kennedy Wilson, according to an investor presentation, with $145 million being used as fund, joint venture and separate account co-investment capital and $22 million to pay down debt. The remainder of the capital is expected to be used to purchase shares and pay fees and expenses. Kennedy Wilson and Prospect were unavailable for comment. Prospect raised $245 million in its November 2007 IPO.

The deal raises many questions about the future of Kennedy Wilson and its managers, however McMorrow stressed on an investor call the management team would retain a 36 percent stake in the new entity saying it “aligns us with everyone investing in this transaction”.

Under the terms of the acquisition, Kennedy Wilson and a Prospect subsidiary will merge, with the name Kennedy Wilson remaining intact. It will be a “wholly-owned subsidiary of Prospect”, a regulatory filing said.

Kennedy Wilson currently has five active value-added and opportunistic discretionary funds and more than 10 separate accounts targeting the US, Hawaii and Japan, the presentation said. Around 80 percent of Kennedy Wilson’s investment activity is done through its separate accounts. The firm said it had achieved a gross IRR of 39 percent on 92 realised investments since it was purchased by McMorrow in 1988.

McMorrow said the new firm would be an active player in targeting distressed commercial and residential assets, particularly in California and Japan, over the coming months and years. “This is probably the greatest opportunity we have seen in our careers on the buyside for distressed real estate,” he said.

One deal the firm is keen to replicate is the purchase of The Mercury condo complex in downtown Los Angeles. The 149-unit partially-sold apartment building – which used to house the Getty Oil headquarters – was bought with $12 million of equity in June for a discount of 36 cents on the dollar.

The firm initially had a two-year business plan for the property but to date 113 units have been sold with expectations the deal will be fully realised in December. The firm said it expected a 2x equity multiple and levered IRRs of 200 percent. “There will be some very deep market opportunities on the residential side in the next year and half,” McMorrow added.