South Street Partners, a Charlotte, North Carolina-based real estate investment firm, has closed its inaugural discretionary commingled fund with $225 million of total capital raised, exceeding its $100 million target.
The vehicle is one of nine first-time real estate funds that have closed so far this year, raising an aggregate $1.82 billion, according to PERE data. At $225 million, South Street’s fund is slightly larger than the $200 million average fund size for this year’s debut offerings.
The year-to-date total for first-time funds closed is nearing the full-year 2021 tally of $1.91 billion raised across eight funds, with an average fund size of $240 million, PERE data showed.
The SSP GP Fund I will focus on opportunistic, value-add or special situation investments, targeting predominantly residential property types in the Southeast region of the US.
The fund is structured as a GP fund, meaning that South Street uses the fund’s capital to form joint venture with larger institutions on investments. The institutions pay fees and promoted interest to South Street as the operator and asset manager, a portion of which pass through to investors in the fund.
The firm typically invests 10 percent of the equity in its joint venture deals, meaning the new vehicle can provide the firm with up to $2.25 billion of buying power.
Chris Randolph, partner, believes the fund being oversubscribed by double its target can be attributed to the firm’s track record and expertise in its target markets within the Southeast region and the Sun Belt.
“[These markets] are primed to outperform long term in the post-covid investment environment,” Randolph told PERE.
In addition to partnering with institutional investment firms on large-cap transactions, South Street will also pursue small and mid-cap deals utilizing the firm’s balance sheet.
“We will fund 100 percent of the equity in opportunities, typically small- to mid-cap deals, where project level returns are equal to or greater than the aggregate returns in joint venture deals, which are typically large-cap,” said Randolph.
The firm also expects to generate co-investment opportunities for its limited partners with the larger transactions it sources.
While the fund has the ability to invest across all real estate sectors and regions, it is mainly focused on private residential club communities and resorts primarily located in drive-to markets.
“These regions and asset classes have benefited from the in-migration and travel patterns of Americans over the last two decades which was only further accelerated by the covid-19 pandemic,” said Randolph.
He added that warmer climates, tax efficient policies and business-friendly municipalities are just a few of the drivers for these demographic trends.
The firm believes its investments have downside protection against current market disruptions caused by inflation, rising rates and geopolitical uncertainty.
“While nothing is recession-proof, we believe our current portfolio is defensively positioned to withstand the current market volatility via low leverage, long-term equity positions and strong operational models with recurring cash flow streams,” said Randolph. “Inflation and interest rate hikes may slow sales, but the consumer demand for our unique properties has not waned.”
Existing investments include Palmetto Bluff, a private residential club and resort community, and Kiawah Partners, a residential portfolio, both in South Carolina.
“In terms of new investments, we are being very patient and selective in this current market environment. That said, we are still finding interesting opportunities for our investors,” said Randolph. “The deals we are capitalizing today are not your typical widely marketed deals. They are either off market or marketed on a limited basis for various reasons. Many of them include operating businesses that other equity investors don’t want to take on.”
More recently the firm has been executing on recapitalizations whereby the sellers are retaining a meaningful portion of ownership and South Street provides operational and asset management expertise, along with additional capital.
The firm launched in 2009 and previously capitalized investment opportunities with joint venture partners on a deal-by-deal basis.