In recent years, one could be forgiven for thinking that the United States, in the jargon of Hollywood publicists or reality TV hosts, could use a bit of a makeover. International opinion of US foreign policy is at one of its lowest points in the post-World War II era. Faith in some of the most bedrock of American ideals has been tested by the scandals at Abu Ghraib, the prison at Guantanamo Bay, the controversy over the Dubai Ports deal and the recent furor over illegal immigration. And then there is the US World Cup team, whose performance in this summer's tournament seemed to support nothing but the fact that America, both on and off the field, is out of step with the rest of the world.
Anti-American sentiment is no doubt familiar to any private equity real estate investor. Attend any real estate conference these days and talk inevitably turns to the difficulty of finding deals in the US, the largest, most mature and thereby most competitive market in the world. Institutional investors are recalibrating their real estate portfolios in order to deploy more and more capital to overseas investments. And some days it seems like every opportunity fund manager, real estate investor or guy who once worked on a deal back in the 1980s is raising capital for India, China or Eastern Europe.
Yet despite the prevailing winds, something just doesn't feel right, as if the action on the ground doesn't necessarily reflect the hyperbole on the dais. Over the past few months, for example, three of the biggest names in the private equity real estate industry—The Blackstone Group, Apollo Real Estate Advisors and Lubert-Adler—have closed on funds with a combined total of $7.7 billion. All three of these vehicles, in addition to the reputation of their managers, have something else in common: one, they all have a roman numeral V at the end of their name; and two, much, if not all, of their capital will be invested in the US market.
Blackstone, of course, has been one of the most active private equity real estate investors in recent years, focusing many of their dollars on large, publicly traded hotel and office REITs. Apollo, for its part, captured the headlines last month when it announced the $1.2 billion acquisition of department store chain Lord & Taylor. Lubert-Adler, by contrast, has merely been kicking back its heels: Last month, the firm completed its purchase of grocery store chain Albertson's alongside a consortium of investors for $17 billion, one of the largest private equity transactions ever.
“That may be one of the greatest ironies of today's market,” noted David Ferrero, the real estate investment officer at Harvard Management Company, in a recent interview with Private Equity Real Estate. “With all the talk about how tough it is to find deals, many managers are putting more and more capital to work more and more rapidly.”
Irony, of course, is rooted in truth. And the truth is this: It is more difficult to find US opportunistic deals with the same risk-return profile as in years past, but that is not the real issue. What no doubt irks some general partners (and, even more so, their investors) is that a vehicle with a fixed 20 percent cost of capital may be ill-suited to today's capital-rich environment, be it in the US or beyond.
Though changes to the opportunity fund structure may not be around the corner, US opportunistic investors may have another reason to take heart.
Last month, at the second annual European Real Estate Forum, hosted by PERE in London, Derek Quinlan, the founder and chairman of Quinlan Private, delivered a keynote address in which he discussed how Ireland had created one of Europe's fastest growing economies, and consequently, one of its healthiest real estate markets. His explanation did not include the usual suspects—lower taxes, free trade or any other tenets of economics 101—but rather something much more abstract: success in the World Cup. When Ireland made it to the quarterfinals of the 1990 World Cup, Quinlan noted, “We now believed we could compete on the world stage.”
If a country of four million people can become a real estate powerhouse with one penalty kick, could the opposite occur here in the US? In other words, could this summer's dismal performance by the US soccer team be the final straw that shatters our national confidence and, in turn, eventually leads to a period of distress and dislocation in our domestic property markets?
Now that would be ironic.
KSL Capital Partners raises $1bn
KSL Capital Partners has raised more than $1 billion (€800 million) for its first fund since splitting from Kohlberg Kravis Roberts. KSL Capital Partners II exceeded its $750 million goal after a marketing campaign that was more than a year long. Probitas Partners was the placement agent. KSL also hired hotel expert Bernard Siegel, a former fund manager in charge of acquisitions for hospitality investment at Los Angeles-based Lowe Enterprises Investment, to scout investments. The fund, which will seek at least a 20 percent return in investments in hotels and travel and leisure companies, recently announced it would buy the 444-unit Rancho Las Palmas Resort & Spa in Rancho Mirage, California for $56 million.
Perry Capital forms- luxury resort platform
Denver- and Washington-based Exclusive Resorts has received a $72 million (€57 million) investment, led by New York-based hedge fund Perry Capital, to help fuel $250 million in future real estate acquisitions. The company, chaired by AOL magnate Steve Case, sells memberships that offer access to a worldwide collection of luxury vacation residences. In related news, the company also announced a deal with golf legend Jack Nicklaus to enhance the club's golf offerings. Exclusive Resorts and Nicklaus Designs, which designs golf courses, will also partner to explore future course development opportunities.
Apollo raises $700m real estate fund
New York-based Apollo Real Estate Advisors has closed Apollo Real Estate Fund V with $700 million (€558 million) in commitments. The fund, which the firm said was oversubscribed, will invest in assets across sectors including commercial, residential, hospitality and mixed-use. In recent months Apollo has invested in office properties outside Washington DC; condos in Stamford, Connecticut; a five-star hotel in Hawaii; and 1,865 units of affordable housing in the Bronx section of New York City.
Warburg targets $1bn for debut real estate fund
Warburg Pincus intends to start its first fund dedicated solely to real estate. The firm is raising $1 billion (€800 million) for its debut fund, which will look to place half its capital in Asia, particularly China and India, one fourth in the U.S. and the rest in Europe. Although this will be Warburg's inaugural real estate fund—it previously invested out of the firm's general private equity fund—the firm has invested more than $1 billion in real estate operating platforms.
Broadreach Capital closes on $700m
Palo Alto, California-based Broadreach Capital Partners closed its BRCP Realty II Fund with final commitments of $700 million (€558 million). Broadreach also hired a team of hotel executives led by veteran hotel investor Philip Maritz from Maritz Wolff, according to reports. Maritz will seek investments on behalf of Broadreach but will also continue to manage the more than $1 billion hotel portfolio held by the company that bears his name.