Starwood launches core-plus business – Exclusive

Starwood Capital Group, best known for its series of opportunistic real estate funds, has entered the core-plus space.

The Greenwich, Connecticut-based private investment firm has secured its first major investor in the strategy, the Teachers’ Retirement System of the State of Illinois. Last month, the pension plan committed $300 million to form a separate account in value-added real estate globally. However, the gross return target for the strategy – 9 percent to 11 percent – is understood to be more in line with that of a typical core-plus strategy.

Illinois Teachers also has the ability to upsize its separate account by an additional $200 million to $300 million over an unspecified timeframe for a total potential commitment of up to $600 million. Although Starwood has previously set up co-investment vehicles for specific investments, the account marks the first time the firm has formed a blind-pool, diversified separate account.

Overseeing the account will be Christopher Graham, Starwood’s head of real estate acquisitions for the Americas, Lanhee Yung, managing director of global capital raising and investor relations, and Ethan Bing, senior vice president in the acquisitions group.

To date, Starwood, led by chairman and chief executive Barry Sternlicht (pictured), has not approached other investors for its new business line, which will be diversified across property types and focus on investments in the G7 countries of the US, Canada, France, Germany, Italy, Japan and the UK. The firm is understood to be making new acquisitions for the core-plus strategy, rather than rolling over investments from its opportunistic funds.

Illinois Teachers is a longtime investor with Starwood’s opportunity fund series. It was a limited partner in the first closes for Starwood Distressed Opportunity Funds IX, X and XI. Starwood raised $5.6 billion for Fund X in March 2015 and $4.2 billion for Fund IX in April 2013. It is targeting up to $6 billion for Fund XI and raised $2.7 billion for the fund in October, in its largest-ever first close.

With Fund XI, Starwood intends to invest in approximately 50 to 60 transactions, primarily in North America and Europe, with a gross target of 17 percent to 20 percent and a net return target of 14 percent to 16 percent, according to meeting minutes from the Public Employees Retirement Association of New Mexico in June.

At the time, the firm was in the process of making its final investments for Fund X, and had closed on 41 assets that were generating a 22 percent IRR for the vehicle. Meanwhile, Fund IX had 56 investments and was on track to generate a 32 percent asset-level return, the minutes said.