Private fund managers could find raising blind pool capital through the US public real estate markets more difficult in the future as retail and institutional investors become increasingly picky about their investments, Mayer Brown’s Ed Schneidman told PERE.
This summer, a wave of private real estate fund sponsors targeted the public markets as a means of raising equity for their debt strategies, launching blind pool vehicles that would target distressed commercial mortgages.
Ed Schneidman, partner corporate matters and securities, Mayer Brown
Starwood Capital Group was the first, and most successful, raising more than $920 million for its mortgage REIT, Starwood Property Trust, in August and was quickly followed by the likes of Colony Capital, Apollo Global Real Estate, Ladder Capital, AllianceBernstein, Brookfield Asset Management and Marathon Asset Management among others. 
I’m sure we will see more sponsors target this area, it’s just a question of how many. The public markets are being particular about what they invest in.
However, as soon as investor appetite for blind pool emerged, it apparently disappeared, with Colony and Apollo raising just 50 percent and 33 percent of their respective equity targets and Ladder and AllianceBernstein postponing their planned IPOs. (Read PERE’s interview with Ladder Capital and plans for its partial blind pool REIT here).
Schneidman, a corporate and securities partner at the Chicago-based law firm, said part of the reason for the rapid decline in investor appetite was the fact the REITs were structured as blind pool investment vehicles, whereby investors backed the firm’s, and its executives’, strategy and track record but had no specified assets with which they could underwrite their investment.
The relatively untested approach worked for Starwood, but, as Schneidman said, public market investors are being selective about what they invest in going forward and possibly questioning how much of a distressed debt opportunity there will be.
“Investors didn’t see the long-term growth opportunity in distressed debt that some obviously believe is there,” he said.
Private fund managers also faced challenges with investors insisting the actual initial value of the REIT shares be as close as possible to the gross offering price per share, with no reduction for costs or dilution before investments are made, according to a briefing paper by Goodwin Procter. In some cases sponsors paid part of the underwriting fees or deferred the fees until a specified return on had been reached. Sponsors were also asked to reduce or defer management fees and reduce or eliminate initial equity grants, the paper added.
It’s not just blind pool debt vehicles that are affected though. Pebblebrook Hotel Trust and Chesapeake Lodging Trust were set to raise $350 million and $250 million respectively in blind pool equity REITs at the start of December. Pebblebrook succeeded in hitting its goal, but the Chesapeake offering was pulled, according to the Wall Street Journal.
Schneidman said blind pool offerings –both debt and equity – would likely continue to be a “pretty limited” fundraising opportunity. Partial blind pools, and blind pools with one to two cornerstone investors already in place, could ease investor concerns by “validating a strategy before pricing”.
However, he stressed, public markets shouldn’t be judged as an easy means of raising capital. “I’m sure we will see more sponsors target this area, it’s just a question of how many are able to succeed. The public markets are being particular about what they invest in.”
Schneidman added, in the longer term, the IPO market was likely to favour private firms with established management and which control an existing income producing portfolio.
Selected IPOs and IPO filings by mortgage REITs in 2009 REIT Name REIT Sponsor Equity AG Financial Investment Trust Angelo Gordon & Co. $300m Apollo Commercial Real Estate Finance Apollo Global Management $200m (actual) Bayview Mortgage Capital Bayview Asset Management $500m Brookfield Realty Capital Corp Brookfield Asset Management $500m Colony Financial Colony Capital $250m (actual) CreXus Investment Corp. Annaly Capital Management $200m (actual) CWCapital Realty Trust CW Financial $250m Cypress Sharpridge Investments Cypress Group/Sharpridge Capital Mgmt $100m (actual) Foursquare Capital Corp. AllianceBernstein $500m* Invesco Mortgage Capital Invesco Ltd. $206m (actual) Ladder Capital Realty Finance Ladder Capital Finance $400m* Marathon Real Estate Mortgage Trust Marathon Asset Management $300m PennyMac Mortgage Investment Trust Private National Mortgage Acceptance Co $320m (actual) Starwood Property Trust Starwood Capital Group $932m (actual) Sutherland Asset Management Waterfall Asset Management $400m Transwestern Realty Finance Transwestern Investment Company $500m Western Asset Mortgage Capital Corp. Legg Mason $500m
(as of 30 September 2009 and according to Goodwin Procter RESource briefing)
* The sponsors have announced the indefinite postponement of these offerings.
If you do not receive this within five minutes, please try to sign in again. If the problem persists, please email: 
