STATESIDE: One and done

It’s the ultimate version of fund envy: the two largest real estate funds in market not only are having no trouble raising money, but stand to haul in all of their billions in one shot. 

It really isn’t fair, is it? How, or why, is it possible that Lone Star Funds, which just began marketing its latest property fund, Lone Real Estate Fund IV, during the fourth quarter, is expected to hold a first and final close on the vehicle in mid-April? This deadline apparently even required one of their largest investors, the Oregon Public Employees Retirement Fund, to change their regular investment protocol in order to get its $300 million commitment into the fund, which has a $5 billion hard cap, on time. 

Even more unjust is The Blackstone Group’s Blackstone Real Estate Partners VIII, which has a $15 billion hard cap. As PERE has previously reported, the New York-based private equity and real estate giant also launched its fund during the fourth quarter, and initially was anticipated to attract a record $10 billion in its first close. As PERE was scheduled to go to press, we were hearing that the close, which was imminent, also was looking like a first and final. 

To be sure, neither Blackstone nor Lone Star are said to have mandated a single close for their funds. Rather, PERE understands that both firms are anticipated to receive enough first close commitments to hit their caps, and set their close dates after consulting their limited partners.

Raising an entire target or cap – especially when it’s in the billions of dollars – in a single close is extremely rare. At the time of this writing, Blackstone had yet to raise a ‘one and done’ property fund – a vehicle that raises its entire target or cap in a single close – and Lone Star has managed it only once prior, with its Lone Star Residential Mortgage Fund I, which collected all $1.3 billion of capital last December. 

‘One and dones’ have been, and remain, extremely difficult to pull off because various conditions need to be met all at the same. For one thing, the close has to consist primarily, if not entirely, of existing investors. Unlike new investors, existing LPs don’t need to conduct lengthy due diligence on the fund manager or the fund, nor do they have to underwrite a whole new team. For the most part, they already are up to speed on the general partner, and any due diligence that they do conduct is likely to be more confirmatory than fact-finding.

Additionally, the fund manager must have a solid track record, strong platform and what one consultant calls a ‘good story’ – something that sets it apart from the rest of the fundraising pack. All three criteria give an investment board the comfort and confidence to approve an investment. In the case of Blackstone, it has one of the best track records in the industry and also is the world’s largest private equity real estate firms, enabling it to bid on deals that few others can. Lone Star, meanwhile, also has generated robust returns for most of its funds and has made a name for itself by specializing in highly complex distressed investments. 

It also doesn’t hurt that Blackstone and Lone Star have both employed the still-unconventional method of group due diligence sessions for their new funds, which enables them to significantly reduce the amount of time they would have otherwise spent in due diligence meetings with new and existing investors. Of course, only managers with the aforementioned criteria can command a big and loyal enough investor base to even make group sessions possible. And as always, favorable economic terms for first close participants, which both funds are offering, help to steer as much capital as possible into the first, and possibly only, close.

In some ways, current investment conditions may be helping to facilitate ‘one and done’ funds. Generally speaking, firms are taking less time to raise capital, thanks to rising confidence in the real estate market and growing interest from institutions globally to invest in the asset class. Meanwhile, many investors have been limiting the number of their investment managers over the past few years. As long as it happy with an existing manager’s performance, an LP will most likely re-up with that general partner rather than do the additional work of underwriting a new firm.

On the flip side, it might have become more challenging for some well-performing managers to raise a fund from mostly existing LPs – and through no fault of their own. As many investors have become more focused on going direct in real estate over the past few years, some institutions that previously committed to a manager’s commingled funds may no longer plan to do so going forward. That’s extremely unfortunate for said fund sponsor, but no one ever said the fundraising world was fair.