AMERICAS NEWS: Hybrid evolution

In 1869, Charles Darwin declared that, in the struggle for survival, only the fittest would “win out at the expense of their rivals because they succeed in adapting themselves best to their environment.”  Over the past 18 months, private equity real estate fundraising has undergone its own evolution as GPs and LPs adapt fund structures to better suit their investment strategies and needs, with club funds and club deals emerging as one of the preferred models for raising capital in a hostile environment, not least from LPs themselves.

Now, however, as the spring thaw starts to grip the fundraising community in the US and as investors start to understand the complexity – and man hours – involved in taking on more discretion, club funds are again evolving. The crux of the issue, one GP said, is the reality that LPs have to underwrite not only the fund sponsor in a club fund, but their fellow LPs as well. What is emerging instead is a variety of hybrid fund structures that take some benefits of a club and apply them to a traditional commingled vehicle.

US REIT Vornado Realty Trust was one of the latest fund managers to close on equity, having taken some of the concepts of the club model for its debut private equity real estate fund, Vornado Capital Partners. Closing the fund on $800 million of equity, including $200 million from the REIT, in February, Vornado deliberately limited the number of LPs in the vehicle from the outset, setting a minimum investment level of $50 million – well above the standard $10 million threshold, according to people familiar with the matter. The strategy was to create a fund backed by a small number of large institutional investors that, while giving the GP full discretion over investment strategy, also positioned LPs for future co-investment deals with the REIT.

Apollo Global Real Estate, the property arm of private equity firm Apollo Global Management, also is in the process of raising a hybrid vehicle that combines commingled, discretionary capital alongside co-investment equity, where the discretion remains with the LP. AGRE US Real Estate Fund, which is targeting $650 million and held a first close on $307.9 million in January, allows LPs committing more than $50 million to also allocate additional co-investment capital to the fund, people familiar with the matter said. No fees are paid on uninvested co-investment capital, with LPs also able to opt in and out of those co-investment transactions, although full discretion remains with the GP in the general fund. Of the $307.9 million raised so far, $200 million is targeting co-investment opportunities, according to a recent SEC filing.

Of course, that’s not to say the commingled fund can be dismissed as a dinosaur. In raising its debut US investment vehicle, GreenOak Real Estate – founded by former Morgan Stanley Real Estate Investing executives Sonny Kalsi, John Carrafiell and Fred Schmidt in 2010 – originally contemplated more of a club structure as opposed to a blind pool vehicle. Today though, having held a first close on approximately $150 million of equity against a target of between $300 million and $400 million, the vehicle has evolved back to more of a traditional commingled fund model, according to people familiar with the matter. GreenOak declined to comment.