AMERICAS NEWS: When size doesn’t matter

It’s fair to say fund of funds manager Penn Square Real Estate Group is no “mega” player on the real estate investment stage. Having just closed its second vehicle, Penn Square Global Real Estate Fund II, the Radnor, Pennsylvania-based firm has raised a total of $376 million in equity commitments since it was founded in 2006.

Despite its size though, Penn Square is investing in one of the largest property club funds going: Brookfield Asset Management’s $5.5 billion real estate turnaround consortium. With a minimum investment level of $500 million, Brookfield’s turnaround vehicle has attracted pledges from some of the world’s biggest investors including China’s sovereign wealth fund, the China Investment Corporation, and Australia’s Future Fund.

However, with consultant The Townsend Group acting as Penn Square’s investment advisor, Fund II – which closed on $145 million of commitments at the end of March – was able to invest in Brookfield as part of a $500 million pool of capital brought together by Townsend.

[Relationship with Townsend] has proved a powerful relationship. Managing partner Jonathan Albro

Managing partner Jonathan Albro said the fund had been able to access deals and opportunities normally reserved for the largest institutional investors precisely because of its relationship with the Cleveland-based consultant.

“It has proved a powerful relationship,” he said, adding the firm was able to secure the same terms as the largest investors in the consortium, including a 12 percent preferred return and a deferred fee on each acquisition payable when the consortium capital is returned.

“Brookfield’s turnaround consortium is a vehicle normally open to only the top two percent of global investors and would not have been open to smaller investors such as a fund of funds without that relationship with Townsend,” Albro said.

Penn Square allocated $10 million to the Brookfield consortium – which is currently lining up 50 percent of its capital to help the recapitalisation of bankrupt US REIT General Growth Properties – through its Fund II. The vehicle has also committed capital to three other funds, including Fortress’ $800 million Japan Opportunity Fund and Brockton Capital’s second vehicle, which is reportedly expected to close on £500 million (€565.4 million and $768.7 million) in the summer. At press time, no capital had been called by the underlying GPs.

Penn Square closed its first fund of funds on $231 million in May 2008, and is fully invested in more than 14 vehicles, including The Blackstone Group’s €3.1 billion Blackstone Real Estate Partners Europe III. Roughly 50 percent of Fund I’s capital has been called.

Albro said the firm was still targeting as much as 60 percent of Fund II towards GPs focused on international opportunities, with 40 percent eyeing US funds. He added: “Generally GPs are looking for equity returns through the debt structure. That’s the play versus buying pure buildings at the moment.”