Redcar Properties, a Los Angeles-based real estate manager, has closed its second fund with $418 million in capital commitments, PERE has learned.
The firm raised capital from foundations and endowments, private and public pensions, family offices, insurance companies, wealth managers, and high-net-worth individuals in North America, the Middle East and Europe. The fundraise is slightly bigger than the firm’s inaugural vehicle, which the firm closed in 2020 with $412 million in capital commitments.
However, the firm had initially targeted $500 million for Redcar Fund II, per PERE data. This puts Redcar in the minority of firms that have closed on a fund below target this year. Only 16 percent of funds closed year-to-date have missed their target, according to preliminary Q1 2023 data from PERE. Between 2018 and 2022, target-missing funds accounted for 17-26 percent of vehicles closed.
Although the percentage of funds closing below target has declined so far this year, managers are still facing a difficult fundraising environment, particularly because of the denominator effect that has hit investor portfolios, Christopher Chee, co-managing partner, told PERE.
“A lot of people were looking at us, and then their allocation went away because the exposure to real estate was so high within the overall portfolio, particularly the endowment crowd,” Chee said.
A second challenge was investors’ perception of office. “The sentiment towards office became so negative,” Chee said. “Just look at the office REITs. They’re like the worst performing sector. They can do no good.”
The firm invests solely in offices and in particular focuses on converting existing warehouse space into office. In the first fund, Redcar purchased 15 Los Angeles creative office properties, offices targeting more creative sectors like tech and gaming, as well as streaming services like HBO and Amazon Studios. The firm’s founder and co-managing partner, Jim Jacobsen, described the properties as low rise with outdoor space and operable windows, usually designed with higher quality materials like walnut and steel.
Redcar targets opportunistic returns in the net 18-20 percent range. However, unlike other opportunistic funds, including Chee’s former shop Blackstone, Redcar uses low levels of leverage.
Although it can use up to 50 percent leverage, Redcar has remained disciplined with both of its funds. The firm employed around 35 percent leverage with Fund I and 29 percent leverage to date with Fund II.
In creating attractive office properties, Redcar increases the rents and net operating income of those assets. Chee said the operational properties in the firm’s portfolio have 100 percent occupancy.
“We’re driving returns through asset transformation, not through high leverage momentum plays,” Chee said.
With Fund II, the firm is expanding outside of its home market of Los Angeles for the first time and investing in Austin. Chee said Austin has a tenant base similar to Los Angeles, with tech featuring prominently.
Redcar is looking to deploy around 20 percent of the fund in Austin, primarily via a co-investment sidecar, Chee said. The firm currently has made two investments in Austin so far, in the city’s St Elmo and South Austin submarkets.
Redcar was founded by Jacobsen in 2011. Chee joined the firm as co-managing partner in 2015 after he left Blackstone. As with Fund I, Evercore served as the global capital advisor for Redcar while Kirkland & Ellis acted as legal adviser.