US NEWS: Back to basics

Following the success of its investment in General Growth Properties (GGP) through a club-style investment vehicle, Brookfield Asset Management recently announced its intention to raise $4 billion in equity for a traditional global real estate opportunity fund. This fundraising initiative – one of seven the Toronto-based investment manager has in the works over the next two years – reveals a great deal of confidence in the market from Brookfield.

In a letter released to its shareholders last month, Brookfield said the $4 billion fund “will be global in nature and encompass all of [its] new opportunistic real estate investment activities.” Although further details on the vehicle have yet to be disclosed, Brookfield chief executive Bruce Flatt indicated to delegates at last year’s annual PERE Forum: Europe that the firm’s next capital-raising effort likely would take the form of a traditional private equity real estate fund.

This major fundraising effort from Brookfield marks one of the largest of its kind since the global financial crisis and the firm’s first since its $5.5 billion Real Estate Turnaround Consortium in 2009. Indeed, the new effort suggests that Brookfield must feel there are some further gargantuan opportunities out there. The fact that the company has designs on raising this kind of money is particularly noteworthy given it still has $3.1 billion in capital from its Turnaround Consortium left to deploy.

The move also suggests a great deal of confidence in its investors. The turnaround consortium was an “of the moment” opportunity, given how hard it was at the time to get institutional investors to commit to a closed-ended fund. Given that this latest effort is targeting an amount similar to what it initially targeted for its Turnaround Consortium, except with discretion shifting from the LPs back to the firm, Brookfield is likely to have received indications of interest from its existing pool of investors, as well as perhaps some new potential investors. And with the property markets stabilising, the time seems right for investors to once again trust a partner in such a vehicle.

Also likely giving Brookfield some confidence is the fact that it isn’t alone in its return to the mega fund game. The Blackstone Group started fundraising for a $10 billion-plus global real estate fund in April, and the Rockpoint Group launched a $2.5 billion opportunity fund in March. Meanwhile, Lone Star Funds already has proven what determination can accomplish, closing its latest fund on $4.2 billion at the end of April – including an estimated $3.5 billion raised in the last 12 months of the campaign.

While these competitor efforts may give it some comfort, Brookfield need look no further than its own successes. Indeed, the Turnaround Consortium exceeded its original $4 billion fundraising target by $1.5 billion, and the firm has shown it can take down big transactions, succeeding in its bid for GGP.

Speaking of GGP, Brookfield initially considered the acquisition to be a restructuring investment when it first got involved with the bankrupt REIT through the Turnaround Consortium. Now, however, the firm considers the investment to be a long-term holding – a sentiment it backed up by buying out one of its partners in the recapitalization, hedge fund Fairholme Capital, in a $1.7 billion deal. The January transaction boosted Brookfield’s stake in GGP to 38 percent.

“GGP has a number of things working in its favor for it to grow at a healthy pace,” said Flatt during the firm’s first quarter conference call last month. “It has many short-term vacancies that can be converted into proper occupancies. Plus, retails sales in America are going up.”

Meanwhile, Brookfield also is marketing two new private equity funds, each targeting $1 billion. The first is a follow-on offering to its Special Situations Fund series for distressed investments, and the second is a private equity fund focused on Brazil. The money for these funds is coming from an equal mix of expanded relationships with current clients and the addition of new clients to the business, according to last month’s letter to shareholders.

All told, these fundraising campaigns – plus a couple more yet to be revealed – are expected to raise more than $7 billion in equity through a mix of opportunistic, value-added and private equity strategies over the next two years. In addition, Brookfield still has a total of more than $8 billion of dry powder to invest in real estate, real assets and infrastructure opportunities, according to its 2010 annual report, which was released at the end of March.

Brookfield may be returning to traditional fundraising structures, but its fundraising targets and the amount of capital it will need to invest over the next few years are far from average. It may be back to basics for the firm, but its goals are anything but basic.