AMERICAS NEWS: Operational allocations

In the quest for lower fees, some LPs are looking to invest their capital directly with real estate operators as opposed to paying double promotes when allocating equity through a fund manager. Indeed, the question of operator versus allocator has led some of the largest institutional investors to plough billions of dollars into JVs with operating partners this year alone.

For Detroit-based private equity real estate firm MayfieldGentry Realty Advisors, increasing demand for operators is a good thing as it looks to raise its second fund, MGRA Genesis Value Fund II. Founded by Chauncey Mayfield in 2003, the firm is betting on the fact that its in-house property, project and asset management capabilities will appeal to LPs looking to move towards the operator investment model.

The fundraising environment is different today compared to just three or four months ago.

Targeting $400 million for the value-added vehicle, MayfieldGentry will focus primarily on office properties valued at up to $50 million in the Washington, DC, metropolitan area, particularly Virginia and south Maryland; Raleigh and Charlotte, North Carolina; Boston and Jacksonville, Florida. It also will have the ability to invest in retail, industrial and multifamily assets, as well as debt opportunities, according to people familiar with the matter.

MayfieldGentry declined to comment on the fund, but sources said the vehicle – which for the first time will seek to raise funds in Europe and Canada – would target net IRRs of around 13 percent to 14 percent. A first close is expected in the summer of 2011, and a final close by the end of the year.

The firm, which raised $102 million from US plan sponsors for MGRA Fund I in August 2009, originally expected to launch MGRA Fund II in the first quarter of 2010, but the lacklustre fundraising market prompted executives to postpone the equity haul. “The fundraising environment is different today compared to just three or four months ago,” said people familiar with the matter.”

Part of the attraction of the fund, these people said, was the question of LPs investing in operators versus allocators. By having greater control over all aspects of asset, property and project management, operators-cum-fund managers could help drive returns through lower operating costs, renovations and the structuring of capital. Investing in operators also allows investors to avoid the double promote issue.

MayfieldGentry last closed a deal in April 2008 when it acquired an 81,000-square-foot office property at 1522 K St, NW, in Washington, DC, from Intrepid Real Estate for $30.1 million. The property was 89 percent occupied at the time of the transaction, according to data provider Real Capital Analytics.