They say the best things come to those who wait. Currently, Starwood Capital Group appears to be seeing the benefits of heeding this old adage with its latest commingled real estate fund.
The last time we heard about Starwood’s fundraising efforts, the Greenwich, Connecticut-based investment firm had closed on approximately $2 billion in commitments on behalf of its latest global real estate vehicle, Starwood Distressed Opportunity Fund IX, in September 2012. A final close of $3 billion was anticipated by the end of that year.
When December arrived, however, there was no news about the fund. Likewise, in January and February of this year, there was no word on Fund IX’s status. Finally, when April rolled around, it was revealed that, after being in the market for 15 months, Fund IX had closed on a whopping $4.2 billion from more than 75 investors, easily making it Starwood’s largest commingled fund ever.
So, how did Starwood manage to go from raising $2 billion in September to more than twice that amount seven months later? According to Jerry Silvey, Starwood’s executive vice president and chief financial officer, the firm saw a steady stream of interest from LPs, with a number of investors making large contributions towards the end. “We had pretty steady demand during the fundraising period,” Silvey told PERE.
Indeed, when you look at all the interim closings, the influx of capital for the vehicle looks rather consistent. After raising $1.2 billion of equity for the vehicle four months after it launched and holding an interim close on a total of $2 billion in September, Fund IX managed to climb to approximately $3.1 billion by December. Nearly four months afterwards, it garnered an additional $1.1 billion in commitments.
Two of Fund IX’s largest contributions came from the Teacher Retirement System of Texas and the Teachers’ Retirement System of the State of Illinois, which committed $200 million and $150 million to the fund, respectively. Other investors included the New York State Teachers’ Retirement System, the Connecticut Retirement Plans and Trust Funds, the Los Angeles Fire and Police Pensions, the Texas County & District Retirement System and the Public Employees Retirement Association of New Mexico.
“Fund VIII has a very similar investment program to Fund IX,” Silvey said. “LPs were very pleased with the result so, when it came time to market Fund IX, we were able to get a lot of re-ups, as well as attract a lot of new investors.”
Though Starwood originally anticipated a final close at the end of 2012 and the firm had identified all of Fund IX’s investors by December, the process took a little more time to accommodate the approval hurdles of later investors. “We had everyone identified early on, but a lot of larger institutions have very thorough due diligence processes,” Silvey noted.
Ultimately, Starwood reached its hard cap and even wound up having to turn away investors—not unlike what The Carlyle Group did with its Carlyle Realty Partners VI fund. Also not unlike Carlyle, Starwood offered incentives to large investors and early committers. Indeed, for the first time in its history, the firm offered management fee breaks to institutions joining the first close and to larger investors committing more than $150 million of equity.
Now that Fund IX is closed, Silvey said the fund “is the perfect size” for Starwood, as it will allow the firm “to participate in some very profitable transactions” for its investors. Through Fund IX, the firm will invest in distressed debt, value-added and income assets, corporate opportunities, hotels that have been undermanaged and, to a lesser extent, residential land investments.
Starwood, which began investing on behalf of Fund IX at the end of 2012, already has put half of the fund’s capital to work. “We’re seeing a steady stream of opportunities,” Silvey added.
For example, Starwood bought a 9,500-unit multifamily portfolio spanning five states in partnership with Gaia Real Estate. The pair acquired the units for $446 million through a bankruptcy auction after agreeing to invest $22.5 million of new equity to acquire and recapitalize the portfolio’s owner, PJ Finance. In addition, Starwood teamed with New York Life Investment Management to acquire 1372 Broadway in New York. The firm bought the building for $175 million, while New York Life acquired the freehold for $150 million.
The vast majority of these investment opportunities currently are in the US. However, Starwood is prepared to invest more in Europe if it sees more opportunities in that region. Over the last few years, the firm has tripled its overhead in London and sent Starwood’s senior managing director and head of global acquisitions Jeff Dishner to its London office as a means to prepare for more activity.
Furthermore, because Starwood has offices all over the world, it can easily shift its regional investment focus. “I think we’ll see some very interesting distress in Europe over the next few years, so we want to be ready when the avalanche of opportunities starts,” Silvey said. Still, Starwood anticipates that the vast majority of the investments made on behalf of Fund IX will be in the US.