Stockbridge Real Estate Funds and RREEF have won the financial backing of LPs to recapitalise their second opportunity funds, with both managers raising more than $100 million in rescue financing.
San Francisco-based Stockbridge has corralled at least $128 million from investors in its $1 billion Stockbridge Real Estate Partners II fund, after the vehicle was written down to 24.9 percent of cost but with outstanding asset-level debts of $1 billion.
According to investment committee reports from Los Angeles Fire and Police Pensions (LAFPP), Stockbridge spent much of the first half of 2010 urging LPs to back various recapitalisation proposals for Fund II without success.
However in July, after failing to also find outside investment, the firm proposed a new plan for a preferred equity infusion, which won the backing of a major pension fund, and following that other, smaller LPs. The major pension fund provided $125 million of rescue financing, while LAFPP agreed on 19 August to commit an additional $3.75 million on top of their initial $30 million commitment in the 2006 vehicle. 
More than 30 fund managers are believed to be in the process of trying to raise rescue capital for their investment vehicles, according to industry professionals.
Other investors in Stockbridge Fund II include the California Public Employees' Retirement System, the California State Teachers' Retirement System and New York State Common Retirement Fund. Stockbridge did not respond to calls for comment.
RREEF has also won the backing of LPs in its $1.6 billion Global Opportunities Fund II, raising $100 million of fresh capital, provided in the form of a replacement capital facility.
According to people familiar with the deal, the capital was structured as a senior unsecured debt facility with a two-year term and a one-year option to extend. The cash will be used to restructure and pay down debt and for property improvements. RREEF declined to comment.
More than 30 fund managers are believed to be in the process of trying to raise rescue capital for their investment vehicles, according to industry professionals. The rescue capital can take a variety of different structures. By providing capital as a new debt facility, backed by covenants, RREEF investors have established a deadline for the return on their new investment. Stockbridge investors committing rescue capital via preferred equity infusions must wait until the fund has liquidated to receive a return on capital. Stockbridge estimates LPs taking part in its recapitalisation plan will achieve a return of 69 cents on the dollar … Townsend however suggested recapitalisation participants would achieve 31 cents on the dollar.
For LAFPP and other investors taking part in Stockbridge’s Fund II recapitalisation, ploughing additional capital in the fund could see a greater amount of the original equity commitment returned to investors.
Stockbridge estimates LPs taking part in its recapitalisation plan will achieve a return of 69 cents on the dollar compared to 53 cents on the dollar for those not participating. LAFPP’s consultant, The Townsend Group, however suggested recapitalisation participants would achieve 31 cents on the dollar compared to just 10 cents on the dollar for those doing nothing.
As part of the recapitalisation plan, Stockbridge also agreed to reduce its fees by 33 percent.
LAFPP said the fund’s value had declined dramatically in part due to timing but also owing to a “significant exposure to development projects and land holdings, lack of tenants for the office assets and a need for fund-level recapitalisation”. Fund II, which is 95.4 percent invested in 12 deals, has a loan to value ratio of 76.4 percent, with $221 million of the $1.02 billion of debt recourse to the fund.
To read more about the Stockbridge recapitalisation, see the September issue of PERE magazine out on 1 September.
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