The retail trade

Thomas Sittema sits atop CNL Financial Group, an Orlando, Florida-based alternatives firm with a particular claim to fame right now. Indeed, it currently is involved in the IPO of a non-traded company to be managed with Kohlberg Kravis Roberts & Co, which he says is the private equity firm’s first retail fund strategy from a capital perspective.
 
As one can see from the announcement in April this year (click here), Corporate Capital Trust is a private equity vehicle managed by CNL and KKR that primarily is targeting the debt of privately-owned US companies. Being a pure corporate debt play, this fund is not of particular interest to private equity real estate folks.

However, what is of interest is the fact that KKR is turning to retail investors rather than institutional partners for capital, raising capital by issuing non-traded common stock over the next two years. Bill Sonneborn, head of KKR Asset Management, said at the time of the launch: “Corporate Capital Trust allows a broader range of investor greater access to an asset class that traditionally has only been available to large institutional investors.”

Taking a step back, Sittema points out that this is the way the tide is turning given the extra challenges involved in winning commitments from institutional investors, where the vast majority of commitments to private equity funds come from.

CNL is well known in the US as a participant in real estate investing and is a fund sponsor in its own right. It was set up in 1973 by executive chairman James Seneff and has gone on to form or acquire companies with more than $24 billion in assets. For example, it launched and grew a $6.5 billion company focused on US hotel investing that ultimately was sold to a Morgan Stanley real estate fund in 2007.

However, what sets CNL apart in terms of capital raising is that it operates a capital markets team plugged into a network of independent broker-dealers and their financial advisors to access retail investors that typically invest $30,000 in CNL’s products. These investors are not the same type that might be clients of Goldman Sachs’ private wealth management arm – able to write out cheques for £1 million each – and certainly are not ultra high-net-worth investors, in the style of Bill Gates and Warren Buffett. Instead, they are more likely to be the average doctor, dentist and lawyer across the country. “Some of the large-scale fund managers also would focus a bit in this sector, but generally it is a small portion of their capital raise. The lion’s share is from large institutions worldwide,” explains Sittema.

There are a few examples of private real estate investment management firms such as the developer-cum-fund manager Hines from Chicago that tap retail investors, but why is it not widespread practice for private equity-style firms in general? 

Sittema says: “The reason private equity firms raising capital via retail investors is not widespread is because it is a very difficult channel to access and it is very costly to set up. The advantage CNL has is that it has been doing this for 25 years. It has been able to build a strong platform along with strong relationships in the independent broker-dealer channel.”

Over the years, CNL has received investments for the products it promotes from between 250,000 and 300,000 investors.  “We raised an average of $1 billion per year over the last three years,” says Sittema.

That would compare favourably with many private equity real estate fund managers in the larger bracket.

The way CNL structures its real estate investment vehicles is chiefly via untraded real estate investment trusts, which are listed with the US Securities and Exchange Commission but whose shares are not traded. According to Atlanta research firm Blue Vault Partners, there were some 61 non-listed REITs with an estimated $70 billion in assets at the end of 2010. Investors pumped in $8.1 billion in capital in 2010 – a rise of 25 percent on 2009.

Says Sittema: “Unlisted REITs are a huge part of our business and the industry overall, and they have been growing in size. Today, it is probably a $70 billion business, so it clearly is smaller than the publicly-traded REIT sector, but it is growing and we probably are raising $8 billion to $10 billion of equity capital per year.”
 
Having sold three of its non-traded REITs in 2006 and 2007 (which had some $15 billion in assets between them), CNL is now left with its Global Income Trust, Global Growth Trust, the CNL Properties Trust and CNL Lifestyle Properties. The first two of these – Global Income Trust and Global Growth Trust – were set up with Macquarie Group of Australia within the past year and are international in scope.

Recently, CNL drafted private equity real estate firm MGPA as a sub-advisor to the funds, which PERE reported on at the time (click here). CNL will continue to buy assets in the US and Canada as the single sponsor, while Macquarie scouts property in Australia and new partner MGPA looks to buy property in Europe and Asia. Meanwhile, CNL is working with the “broker-dealer community” to raise capital for these funds and deploy it.

When asked whether he foresaw more private equity-style real estate firms using the retail investor channel given that it had become harder to tap institutional investors, Sittema says: “We think that is going to happen, exemplified by the new fund we have set up focusing on high-yield corporate debt in partnership with KKR. So, yes, we do think there will be more.”