S2 Capital raises and deploys its first fund

The Dallas-based manager has raised $400m for its first fund and, having completely deployed the vehicle, plans to go back to fundraising later this year.

S2 Capital, a Dallas-based multifamily property investment specialist, has raised $400 million for its first multifamily fund.

The firm hit the hard-cap of S2 Multifamily Value-Add Fund I, after originally targeting $250 million, PERE understands.

It is the second largest first-time, US-focused private real estate fund raised this year, behind Electra America’s $500 million hospitality fund, which hit the market in March 2021, as per PERE data.

Launched in February, S2’s fund was also the only first-time fund this year to date to both be launched and raised in 2022, again according to PERE data.

The fund has been fully deployed as the firm was matching its deal pipeline with capital, said chief executive officer Scott Everett.

Indeed, PERE understands a successor fund is already in the works and could be launched before the end of the year as the firm bids to continue matching investor demand with the deals it is sourcing.

S2 invests in the Sunbelt states of the US, including Texas, Florida, Georgia and North and South Carolina. S2 targets Class B multifamily where it believes it can increase net operating income.

Everett: The right time for a fund as majority of capital raising on a deal-by-deal basis

The fundraise marks a graduation from a deal-by-deal approach capitalized via joint ventures adopted by S2 during the last decade. The firm will target north of 16 percent net IRRs, PERE understands.

Two years after its founding, the firm partnered with Pennybacker Capital, an Austin-based manager, their joint ventures helping to institutionalize the business, Everett said. S2 still does deals with Pennybacker, but the firm is not an investor in the fund, he added.

S2 transitioned to third-party fundraising in an effort to harness appetite from investors to pivot their asset bases from office or retail to multifamily, Everett said. As managers with discretionary capital operating in the asset classes multiplied, that market became more competitive for S2.

“I was the only one raising dollars, and we were doing it for every single JV we were doing,” Everett said. “As we got bigger and bigger, we’re doing 15 to 25 deals a year. Putting together an $80 million to $100 million cap stack every two weeks with a new partner was becoming a bit cumbersome.”

Fortunately, the firm had built up enough support from its joint venture partners. S2 raised around 60 percent of the fund from existing investors with which it has relationships. The other 40 percent was introduced by those relationships. The new investors leaned on existing investors in their diligence of the fund, helping speed up the vetting process for the new relationships, Everett said.