After years of advising on real estate funds, Probitas Partners is now seeking to raise capital for direct property deals, PERE has learned.
“We know there’s substantial appetite from sovereign wealth funds, pension funds and other institutional investors of scale to invest in direct real estate,” said Michael Hoffmann, the firm’s co-founder and president. But many institutional assets are often widely marketed by brokers, which give prospective buyers a 1-in-200 chance of winning the deal. “At the end of the day, they don’t want to extend resources for such a low probability.”
Hoffmann noted that the genesis of the new business came partly from institutional investors whose board members were expressing frustration that their investment staff were not putting sufficient amounts of capital to work in real estate. “As the market became more competitive, they have been putting out less capital, not more,” he said.
At the same time, raising capital for real estate commingled funds has become more challenging for many firms. “In this market, it’s been particularly difficult getting people excited about funding new managers,” said Hoffmann.
To address both institutional investors’ need to deploy capital and real estate managers’ need to raise it, Probitas plans to identify US commercial real estate properties for sale in advance of any broad marketing. To that end, Probitas has hired John Caley, formerly a senior managing director at Grubb & Ellis’ investment management platform, as a managing director to lead the new direct real estate business. “He will be leading the charge with his personal rolodex to be able to source potential sellers, managers, institutional owners or developers/operators.”
Meanwhile, Hoffmann estimates approximately 20 to 30 institutional investors are interested in pursuing a more direct real estate approach, and for each deal, he expects the firm to narrow the buyer universe to approximately five potential bidders. “There may be very logical players that will narrow that universe naturally,” he said. “It’s really going to be the track record of execution and express demand for product in that geography. We’ll then identify those investors that are most suited for that asset.”
In addition to single-asset or portfolio transactions, Probitas would also seek to identify large-scale joint venture programs. “In those instances, we’re often finding opportunities where the owner would like to be a fund manager,” said Hoffman. “This would be an interim step to develop and maintain assets with institutional capital. It affords them the opportunity to transition to an institutional fund manager.”
Similar to its traditional real estate fundraising business, Probitas expects the client base for its direct real estate business to come from the pool of potential sellers, and to collect a fee based on the amount of capital raised from institutional investors.
The firm’s direct real estate business would focus initially on the four main property types in the US, with a minimum single-asset size of $150 million and a target size of $250 million or larger, and considerably greater for portfolios or joint ventures. “Our prerequisite for the qualifying investor, aside from a track record, is they can speak for 100 percent of the deal,” he said. “We would expect these sophisticated direct investors to do full diligence, get the requisite approvals and get capital moving within a two-month timeframe.”
Hoffmann expects to see the first deal through the new business closed in the next month or so. “We only need a couple of successful deals to prove the model,” he said.
Founded in 2001, Probitas advises on fund products in real estate, private equity, credit, infrastructure, venture capital, hedge funds and special situations. While real estate has formed 20-50 percent of its total business over the years, Hoffmann expects direct real estate to form an increasing part of its real estate business going forward.
Probitas, which has offices in San Francisco, New York, London and Hong Kong, is the latest placement firm looking to build a direct real estate business. In May 2017, Park Hill Group formed a direct brokerage team with the hire of two brokers from Savills Studley, the New York-based commercial real estate advisor.