Kayne Anderson Real Estate has closed its biggest fund to date, PERE has learned, securing $2.75 billion for its sixth opportunistic equity vehicle.
The Florida-based firm beat its $2 billion target for Kayne Anderson Real Estate Partners VI and raised its hard-cap before achieving its oversubscribed final close this month.
Al Rabil, chief executive of KA Real Estate’s parent company, Los Angeles-based Kayne Anderson Capital Advisors, said the fund had benefited from a strategic focus on three specialized property types that have proven to be resilient in the face of the pandemic: medical office, senior housing and student housing.
Although KA Real Estate has long focused on these sectors, they have come into vogue as part of a greater overall focus on alternative property types.
“This is the first time in our 15-year history that we’re swimming downstream from a fundraising perspective, where it’s not a matter of convincing investors that these sectors make sense for an allocation,” Rabil told PERE.
KA Real Estate has deployed about 20 percent of the fund thus far, and has committed another 30 percent. This rapid pace of transaction activity prompted the firm to raise the hard-cap on KAREP VI from $2.5 billion to $2.75 billion, Rabil told PERE. The move was unanimously approved by the fund’s partnership board, he said.
KA Real Estate was marketing its sixth opportunity fund as early as March 2020, according to a meeting document from the Nebraska Investment Council, so the vehicle was largely raised during the pandemic. Rabil said the firm leaned on returning investors, many of which wrote bigger checks, as it raised KAREP VI, though it did secure some first-time commitments through its primarily virtual fundraising campaign.
KA Real Estate is targeting a net internal rate of return of 15-18 percent for KAREP VI, PERE understands.
The fund has no hard parameters around allocations to its three targeted property types. However, Rabil expects the fund to be roughly 50 percent medical office and 50 percent student and senior housing, based on current market activity.
Since 2010, KA Real Estate has invested in medical office through a joint venture with Chicago-based sector specialist Remedy Medical Properties. The groups have acquired properties in 41 states, Rabil said, giving them a distinguishing platform in a space that is still highly fragmented.
“We feel uniquely positioned to take advantage of opportunities in the real estate sector for medical office,” he said. “We continue to see a very significant opportunity set going forward and we expect investor interest in this sector to continue to escalate.”
The medical office sector was largely unscathed by the pandemic, Rabil said, as was off-campus student housing, even as school closures rattled some investors.
Senior housing took a reputational hit early in the pandemic, but Rabil said the sector has already bounced back, particularly in the higher end of the market in which KA Real Estate invests. He noted that financing and new construction in the space remains in a slump. He said that he expects this to create a favorable supply-demand imbalance in the years ahead, as more Baby Boomers reach retirement age.
KAREP VI adds to the deluge of capital closed by multibillion-dollar funds this year. But unlike in the recent past, these vehicles do not constitute mega-funds – those of $5 billion or more.
Instead, there has been a preponderance of mid-size vehicles – those between $1 billion and $4.9 billion. During the last quarter alone, 16 such funds closed on a total of $34.8 billion, according to PERE‘s Q3 2021 Fundraising Report.
This year’s surge in mid-size fundraising counters the long-running narrative about private real estate’s ‘squeezed middle.’ It also tracks with the rising popularity of certain specialist managers, particularly those that target multifamily, logistics or alternative/niche properties, as KA Real Estate does.
Despite having just closed on a mid-size vehicle, Rabil told PERE his firm pays little attention to broader fundraising trends. Rather, KA Real Estate merely sets allocation targets in sectors where it feels it can deploy efficiently.
“I don’t spend time thinking about where [the fundraise] places us vis-à-vis other firms of size and scale. That’s irrelevant to us,” he said. “We do spend time thinking about how we can allocate dollars intelligently and generate the investor returns we target.”