No-one can claim it has been an easy ride, but William Benjamin and the European team at Ares Real Estate Group finally celebrated a fund close in December.
At $1.3 billion, Ares European Real Estate Fund IV is one of the larger opportunistic funds to have been raised this cycle, and broke its $1 billion target.
Yet Benjamin and the team had to contend not only with stiff competition from up to a dozen other firms when it launched Fund IV in 2012, but also doubts over European economic growth, and more specifically, a corporate takeover.
Fund IV was launched when Benjamin and his colleagues were at AREA Property Partners, but the whole AREA US, Europe and India firm was taken over by Ares Management in 2013. The takeover caused a pause in fundraising, according to PERE sources at the time, though the firm disputes that. According to Benjamin, who is senior partner at Ares Real Estate Group and head of Europe, the takeover announcement by Ares Management of New York-based AREA preceded a first close of the European fund (initially launched as AREA European Real Estate Fund IV). The merger was completed in July 2013 and the first close occurred in September of that year.
“We are very grateful,” said Benjamin, “that a number of key investors kept their commitments. It was the same team, the same track record, and they closed with us. Of course, as you can imagine, it took a little while for the institutional market to digest what happened, although they applauded it. What is also important is the resounding consent we got from the existing limited partners whose approval we needed to do the deal. The entire team that built and invested previous funds stayed intact. No key person with a capital or lower case ‘k’ left.”
Benjamin said the merger had worked out extremely well and that it made “a good business a better business”. On the fundraising side, the Ares platform provided new investor relations to the AREA team throughout North America, Europe, the Middle East and Australasia, and indeed Ares investors added 30 percent of the final fund tally of $1.3 billion.
Investors, said Benjamin, already liked the European team’s discipline and track record. He said going into the financial downturn, the European fund most exposed to the 2008 vintage had no single deal representing more than 8 percent of the fund. “We were diversified, we never cross-collateralized assets or the debt, and had very few fund-level guarantees. We basically knew our maximum loss positions on every deal, so nothing bled us dry. And we had cash on the balance sheet for opportunities as and when they arose,” he said. Ares, he added, had not only lent infrastructure and extra capital raising capacity, but also “tremendous market intelligence” and even greater deal flow especially via Ares’ debt business.
Investors in the new European fund include Pennsylvania State Employees’ Retirement System (PSERS) which committed $100 million. Advisor Courtland Partners wrote in a letter to PSERS recommending investment that the European program would seek a diversified portfolio of opportunistic assets with 75 percent of the focus being on the UK, Germany and France. Courtland added: “Ares often gains control of such assets by deleveraging over-indebted vehicles or purchasing them out of bankruptcy or administration. Ares also acquires properties which, because they do not meet the strict requirement of core buyers, are overly discounted. In all instances, Ares focuses on real estate fundamentals and seeks to add value through lease-up, re-tenanting, and capital improvements. Finally, Ares pursues selected development in market segments with favorable supply and demand characteristics.”
Another investor was New Mexico State Investment Council. In a letter to New Mexico, advisor The Townsend Group advised a $75 million commitment. Townsend identified advantages of an experienced management team, timely and compelling strategy, pre-specified assets (30 percent) and pipeline, unique access to deal flow, and a US-dollar denominated vehicle for currency mitigation for US investors. At the same time, Townsend noted concerns to consider for New Mexico were to do with “broad opportunistic strategy for targeted returns, reliance on operating partners and fee leakage, and the weak macro environment in Europe”.
In Europe, the track record is stated in public documents as being 19.5 percent gross IRR and 1.7x gross equity multiple from $3 billion of committed capital since 1995. Target returns for the new fund are 16 to 20 percent gross IRR and 12 to 16 percent net IRR over three to five year holding period. AREA European Real Estate Fund III of a 2008 vintage is showing IRRs of 6.22 net and 1.5x, and is projected to deliver gross IRRs of 13.44 percent and 1.7x. Benjamin said of the fundraising: “We are thrilled with the result. It exceeded our expectations.”