Rockpoint’s Walton: ‘Macro and geopolitical risk is on investors’ minds’

Earlier this month, Rockpoint closed on $2.7 billion for its seventh opportunistic real estate fund, Rockpoint Real Estate Fund VII.

The vehicle fell short of its reported $4 billion target and was smaller than its two immediate predecessors in the fund series, the $3.82 billion Fund VI – its largest-ever vehicle – and the $3.28 Fund V, according to PERE data. However, Fund VII is still one of the largest in the fund series as well as the largest real estate fund to close so far in 2024, the data showed.

Rockpoint co-founder Bill Walton said the capital raised for Fund VII effectively came in two parts. After launching the vehicle in Q4 2021, the Boston-based manager quickly reached an initial close in May 2022, raising $1.65 billion primarily from existing investors in its largest-ever first close. Then “the environment changed a lot,” he said.

Fundraising momentum began to slow down in Q4 of 2022 – the timing roughly consistent with the significant spike in interest rates as concerns with inflation intensified.

With tensions escalating around the world, “there’s been growing macro and geopolitical risks,” he said. “The macro and geopolitical risk is on investors’ minds.” Meanwhile “the denominator effect was a really important, critical barrier for some investors.” With other asset classes in their portfolios taking a hit, institutions found themselves overallocated to real estate and unable to invest in more real estate opportunities.

The slow pace of capital returned, as well as large amounts of committed but uncalled capital, were also partly to blame for investors being unable to commit to the fund. The duration and severity of the downturn was another major obstacle for fundraising. Although individual circumstances varied among investors, ultimately many had difficulties moving ahead with commitments, PERE understands.

“Unquestionably, this has been the toughest fundraising environment in our 30-year history,” Walton said. “For the reasons we’ve talked about, it’s been challenging.”

Performance, however, did not factor into those challenges. As of June 30, 2023, Fund VI was generating a 10.9 percent internal rate of return and total value to paid in of 1.19x, compared to peer performance of a 12.2 percent IRR and a 1.12x TVPI, according to documents from the Connecticut Retirement Plans and Trust Funds.

To date, Rockpoint has deployed Fund VII’s capital in 17 deals but has not executed a new deal in over a year, according to Walton. Although the firm has made core-plus investments through two separate accounts and a continuation fund in recent months, the manager has not seen investments with the desired risk-adjusted returns to be more active in its opportunistic strategy, he said.

However, Walton is optimistic about an impending rebound in investment activity. “It does seem the bid and ask is compressing, and I think you’re going to see less friction in markets going forward,” he said.

He also expected more opportunities to arise from the wave of loan maturities over the next five years. “This is one reason why we’re so excited about the environment going forward,” Walton said. “When you look at our track record, in times of dislocation, coming out of dislocation, that’s when we’ve done the absolute best.”

With Fund VII, Rockpoint will target primarily existing assets in the industrial, multifamily, and single-family rental sectors, as well as select hospitality investments. Geographically, the firm will continue to focus on supply-constrained growth markets and submarkets, including select coastal gateway cities.

Assuming another geopolitical issue does not arise, “I think we’re going to be approaching normal probably the end of this year,” said Walton, adding that the firm has plenty of dry powder to deploy over the next six to nine months. “We could be back in the market by the end of this year, early next year.”