Most nascent private equity real estate firms would have enough on their plate raising and investing their initial funds. Chicago’s Oak Street Real Estate Capital, however, is a different story.
“What we’ve done historically is higher income-generating investments,” said managing partner Marc Zahr, who co-founded the firm with James Hennessey in 2009. The firm’s first two value-added funds, Oak Street Real Estate Capital Fund I and II, have pursued a net lease strategy, acquiring primarily office, industrial and retail assets in the US. The vehicles, which raised $40 million and $140 million, respectively, targeted 12 percent net returns.
Now, however, the three-year-old firm is diversifying its offering with an expansion into fund of funds, which provides a higher total return potential of at least 15 percent. Furthermore, it has a different risk profile that Zahr believes does not conflict with the manager’s net lease strategy.
The new platform will be led by Larissa Herczeg, who joined Oak Street in October after nearly three years as director of real assets at Morgan Creek Capital Management. At Oak Street, Herczeg plans to build a very similar business to what she set up at Morgan Creek, consisting of a commingled fund of funds as well as a number of separate accounts, all of which will be primarily focused on small and emerging real estate managers.
“We’re not interested in adding another vanilla fund of funds to an already crowded market,” said Zahr. With a number of well-run multi-manager groups already in operation, he believes the firm’s niche strategy focusing on an “underserved” market is the best way to create value.
There currently are less than 10 official real estate emerging manager programs, compared to more than 100 in private equity, said Herczeg. Even among the handful of real estate-focused programs currently in existence, what differentiates Oak Street is that it is emerging manager itself. “We are a smaller, independent firm,” she explained. “We have a very strong alignment, where the team members are all owners of the firm, so we put our money is where our mouth is.”
Oak Street declined to comment on its fundraising plans, but sources familiar with the matter told PERE that the platform is planning to launch its debut vehicle during the first half of 2013. Such a vehicle would be focused on US managers that are raising less than $750 million and have assets under management of less than $2 billion, with perhaps a small allocation to international managers as well. A particular emphasis would be placed on first-time funds and funds that are raising less than $500 million.
Separate accounts would have a similar focus, but such arrangements would require commitments of at least $40 million or $50 million. Oak Street already is collaborating with Morgan Creek on an existing separate account with the Employees Retirement System (ERS) of Texas, a relationship that Herczeg established while at Morgan Creek. Going forward, both firms will jointly serve as investment advisors to ERS, but Oak Street will handle the majority of the sourcing, due diligence and investment decisions on behalf of the pension plan.
In support of these efforts, Oak Street anticipates hiring a new senior professional and an associate, both of whom would be focused on investments and due diligence. Currently, the firm has six people, with Herczeg and analyst Laura Hyde, also formerly of Morgan Creek, dedicated to the fund of funds business.
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