The Miami Beach-based private investment firm has raised $9 billion to date, having already blown past its $7.5 billion target, and is expected to hold a final close at its hard-cap of $10 billion in late third quarter or early fourth quarter.
Starwood declined to comment, but PERE understands that investor demand for the fund far exceeds its hard-cap and the firm has had to cut back on investors’ desired commitment sizes.
With Fund XII, Starwood, which is led by chairman and chief executive Barry Sternlicht, is set to become the third private real estate manager to have raised $10 billion or more for a closed-ended property fund. Blackstone raised the first real estate vehicle fund to exceed $10 billion, Blackstone Real Estate Partners VI, which gathered a total of $10.9 billion in its final close in 2008.
The New York-based private equity giant has gone on to raise four additional real estate funds over $10 billion: the $13.3 billion BREP VII in 2012; $15.8 billion BREP VIII in 2015; $20.5 billion BREP IX in 2019; and $10.7 billion BREP Europe VI last year, according to PERE data.
It was not until 2019 that Brookfield Asset Management became the next manager to break the $10 billion threshold, collecting an aggregate $15 billion at the final close for Brookfield Strategic Real Estate Partners III.
Starwood is understood to have begun marketing Fund XII at the end of Q2 2020 and raised $6.5 billion in the first close for the vehicle in January. The initial close, which was its largest ever, included investors such as Teachers’ Retirement System of the State of Illinois, which agreed to invest $300 million; Teacher Retirement System of Texas, which committed $200 million; Texas County and District Retirement System, which pledged $175 million; and Illinois Municipal Retirement System, which designated $100 million, according to PERE data.
Fund XII is currently the second-largest real estate fund in market by target size, behind Brookfield’s BSREP IV, which was launched in April with a $17 billion target, according to PERE data. The third-largest real estate fund in market is The Carlyle Group’s Carlyle Realty Partners IX, with a $6 billion target.
Fund XII will be focused on opportunistic and distressed investments, including buying non-performing loan pools, public to private investments, buying assets from public companies, doing recapitalizations and providing rescue capital.
To date, Starwood has committed or deployed $2 billion of peak equity from the fund. Peak equity refers to the maximum equity expected to be allocated for an investment, rather than just initial equity. The highest-profile of these transactions is the $6 billion privatization of Extended Stay America, executed in partnership with Blackstone, which invested through BREP IX.
The vehicle’s target allocation by geography will be 40-60 percent to Europe, 40-60 percent to the US and 0-15 percent to Asia and Australia, PERE previously reported. Target allocations by sector will be 20-30 percent to multifamily and affordable housing, 20-30 percent to hospitality, 20-30 to percent office, 15-20 percent to industrial and 0-10 percent other investments, which can include land and niche sectors such as student housing or senior housing.
The firm is targeting a 14-16 percent net internal rate of return or an 18-20 percent gross return and a 1.6-1.7x net multiple for the fund, according to documents from the Oklahoma City Employee Retirement System.
Starwood’s 2014-vintage Fund X was generating a from-inception return of 14.4 percent against a 15 percent target as of December 31, 2020, while the 2016-vintage Fund XI was producing a from-inception return of 14.2 percent against an 8 percent target, according to documents from Teachers’ Retirement System of Oklahoma, which committed $150 million to the fund in fall 2020.