Today’s investment bank model for private real estate is demonstrably lower risk

Last Friday, the second of the two US investment banks that had major hands in defining the private equity real estate sector before being capsized by the global financial crisis reached a milestone in the world of closed-end commingled fundraising.

Goldman Sachs’ Real Estate Investment Partners was announced as a program attracting an impressive $3.5 billion in capital commitments. PERE understands that capital comprises a main fund, sidecar and co-investment vehicles.

This is a clear demonstration of institutional support for a platform that, while instrumental in the creation of the opportunistic real estate fund, was also synonymous with its pitfalls after the credit crunch. At one stage, the $4.2 billion Whitehall Street Global 2007, the biggest vehicle of Goldman Sachs’ private equity real estate fund series leading up to the crisis, was reporting a performance as low as 19 cents on the dollar.

Yet investors including pension funds, insurance companies, sovereign wealth funds, family offices and high-net-worth clients of Goldman Sachs and including, we understand, some returning investors from the bank’s Whitehall offerings, have taken positions in the new-look Real Estate Investment Partners fund. Evidently, they have taken comfort from the more than $50 billion of equity Goldman Sachs has deployed into real estate across strategies since 2012 and have voted with their checks.

Significantly, they have endorsed a more conservative strategy than the bank was offering pre-global financial crisis. In the bank’s announcement on the fundraise, Julian Salisbury, global co-head of Goldman Sachs Asset Management, the unit amalgamated from Goldman Sachs’ various proprietary real estate investment departments, refers to a blended core-plus to value-add risk and return profile.

That is a far cry from the leverage-heavy days of the Whitehall funds when loan to values of more than 80 percent were commonly stapled to its equity outlays. As per PERE’s coverage, Real Estate Investment Partners is expected to carry gearing at no higher than 60 percent loan-to-value.

In adopting this approach, Goldman Sachs echoes its Wall Street rival Morgan Stanley, which returned to the private equity real estate fundraising fold much earlier. In 2013, its platform, Morgan Stanley Real Estate Investing, raised $1.7 billion for its first fund since having to handle similar troubles emanating from the crisis.

Also a new brand at the time, Morgan Stanley’s North Haven Real Estate Fund VIII, carried a significantly lower risk approach to investing in real estate. While the series maintained the opportunistic wrapper of its predecessor Morgan Stanley Real Estate Funds, target investments boasted strong income streams at the point of investment. Crucially, loan-to-value ratios were lowered to close to 55 percent.

It is important to note these investment bank do-overs are not entirely a response to the troubles of legacy funds, but also part of a bigger journey by financial institutions, including investment banks, to offer broader and less speculative asset management services to investors. The amalgamation of the firm’s real estate platforms into Goldman Sachs Asset Management in 2019 is part of a bigger picture where the bank transfers ownership of significant parts of its future activity from its balance sheet to outside investors. Indeed, Real Estate Investment Partners is part of a meaningfully wider array of third-party real estate offerings than was available during the Whitehall days. For instance, in 2018, the bank collected $4.2 billion for its increasingly popular debt focused Broad Street Real Estate Credit Fund III. Two years ago, the bank attracted $2.75 billion for its second Real Estate Vintage Partners secondaries fund.

At Morgan Stanley, meanwhile, 87 percent of its $55 billion of assets under management are not held within the North Haven opportunistic funds, but within its open-ended core vehicles. That is a very different looking platform to the bank’s proposition pre-crisis.

Many investment banks did not stay the course in private real estate following the global financial crisis, let alone resume flagship private equity real estate fund series. The complexion of Goldman Sachs’ comeback fund, just as Morgan Stanley’s of 2013, demonstrates the two banks that helped define the asset class are putting in place the defensive measures to ensure they stay relevant in it for some time to come.