Putting the ING into distressed investing

ING Clarion is realigning its latest development fund to take advantage of the opportunities on offer.

When private equity real estate investors spoke about distress a couple of months ago, it was generally about the potential opportunity for distress. There was a lot of chatter on the subject, but few investments to support the trend.

A lot has happened in the past two months and distressed investments, namely the opportunity to acquire assets and debt from distressed sellers, has certainly shot up the radar of industry professionals. “There is now a real opportunity to invest in distress,” says ING Clarion director and portfolio manager, Doug Bowen.

Bowen is responsible for ING's development fund series, the Clarion Development Ventures funds, which closed on irs latest vehicle last month, CDV III, on $202 million. Traditionally focused on development and redevelopment projects, the fund is now also spreading its wings to look at land acquisitions and equity investments with distressed developers.

“There is just so much uncertainty out there and there is such a risk-averse atmosphere in the market place right now that we are seeing some good opportunities to capitalise on distress.” Bowen believes the pain will continue through 2009, and possibly into 2010. “These are the times to strike.”

CVD III, which has IRRs of between 16 and 18 percent, will target coastal cities in the US, including Seattle, San Francisco, Washington DC, Boston and New York, as well as some parts of Florida. Phoenix, Bowen says, is a particularly good location for land deals.

By filling part of the capital stack for real estate companies, such as developers, CDV can achieve returns comparable with riskier ground-up development, according to Bowen. “We are not seeing dramatically different returns on our investments, but we are seeing a significant change in the risk profile.”

It's an investment strategy also being enacted by Dunmore Capital founder Sid Dunmore, who said debt related to housing development projects in parts of the US was selling at such a discount that land was often trading at negative values.

The Sacramento-based private equity firm, which traditionally specialises in opportunistic land entitlement investments, closed on five debt packages related to distressed property developments last month, where the underlying assets – finished and improved residential lots in California and Nevada – were trading for less than the cost of making improvements to the land. “[Private homebuilders] have no negotiating power at the moment,” Dunmore said, adding that the discounts being seen were almost as though the seller was “writing you a check and giving you the land at the same time.”

Although the credit crunch has presented new opportunities for real estate players, it has also impacted on fundraising. Bowen said CDV III, which had commitments from seven institutional investors, closed below its original target, but was consistent with the predecessor fund, CDV II, which closed on $205 million in 2006. ING Clarion was believed to be targeting $350 million, according to proprietary data from PERE. Bowen said the firm was “comfortable” with the size of the fund saying the firm's cautious approach in the past year had allowed them to build up “a lot of dry powder. The big shift we have seen in pricing from last year means there are much broader opportunities for us now.”

Going it alone
The Boston-based private equity real estate arm of Fidelity Investments, Fidelity Real Estate Group, run by Michael Elizondo, is seeking investor approval in a bid to spin out from its parent group Pyramis Global Advisors, a division of the investment company, Fidelity investment. A Fidelity spokesman told PERE, the private equity real estate group, known as FREG, expected the deal to take place by the end of the year.

Lehman in buyout talks
Lehman Brothers' private equity real estate business, Lehman Brothers Real Estate (LBRE), could be following in the footsteps of Fidelity with plans for a management buy-out. LBRE closed its latest – and largest – property fund, the $3.2 billion Lehman Brothers Real Estate Partners III, in August. The global heads of the private equity real estate firm, Mark Newman and Brett Bossung, along with European head Gerald Parkes, are reportedly planning the buy-out. A sponsor is also being sought for Lehman's 20 percent stake in LBREP III.

Federal fund
Federal Capital Partners, a real estate investment and operating company founded by former Carlyle Group principals Esko Korhonen and Lacy Rice, has closed its first fund on $238 million. FCP Fund I will focus on equity and debt investments in residential and commercial properties and land in the mid-Atlantic region. The firm has already acquired three residential complexes in Maryland this year for $200 million.

Changing direction
The firm's chief executive officer Robert Brunswick told PERE market conditions had ‘accelerated’ its focus on being a principal investment business. Buchanan Street Partners, based in Newport Beach, California, said it was letting go of its financial intermediary business, including phasing out investment sales and brokerage services. It will now look to principal debt and equity investing particularly in performing and non-performing loans.

China raises
Chinese sovereign wealth fund Chinese Investment Corporation is increasing its ownership stake in private equity giant The Blackstone Group from 9.99 percent to 12.5 percent, according to an SEC filing. Beijing Wonderful Investments, the investment vehicle CIC used to buy more than 100 million nonvoting units of Blackstone prior to the firm's public float last year, is expected to purchasing shares in the open market.

Out of business
Ciena Capital, the New York-based real estate lender and a portfolio company of listed private equity fund manager Allied Capital, filed for bankruptcy protection at the end of September blaming the credit crisis for a “significant” deterioration in the value of its assets. Allied said it expected to record a “substantial” write-down on its investment in Ciena.