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Walton Street raises $710m for Fund VII

Following a first close and roughly $300 million in pending commitments, the Chicago-based private equity real estate firm will be about halfway to its equity target for its latest opportunistic vehicle.

Walton Street Capital has completed its first round of fundraising for its seventh commingled real estate fund, Walton Street Real Estate Fund VII, gathering $710 million in commitments, according to sources familiar with the matter. The firm, which co-invested $50 million of that amount, also has circled an additional $300 million in soft commitments that are expected to close by the first quarter of 2013, sources said. Walton Street declined to comment.

Limited partners include the Teachers’ Retirement System of the State of Illinois and Indiana Public Retirement System – both of which committed $100 million – as well as the Texas Municipal Retirement System, Teachers Retirement System of LouisianaMaine Public Employees Retirement System and Kentucky Retirement Systems, each of which will invest $50 million, according to documents from those pension plans.

Despite these commitments, Walton Street has raised less than half of Fund VII’s $2 billion target after about a year of fundraising. The Chicago-based fund manager, which is led by managing principal Neil Bluhm, has been marketing the vehicle since September 2011 and initially had scheduled the first closing of the fund for December 2011, according to documents from the Contra Costa Employees’ Retirement Association and Louisiana Teachers. The final close of Fund VII was slated for approximately one year later, the documents noted. 

Some of the challenges associated with the fundraise include concerns from existing and prospective investors about the performance of Fund V, a vehicle that raised a total of $1.6 billion in June 2006, sources said. Unlike the firm’s previous four funds – which generated net realised and unrealised returns ranging from 11 percent to 18 percent as of 31 March – Fund V had an unspecified negative internal rate of return (IRR), according to documents from Illinois Teachers. 

Walton Street had made multiple investments on behalf of Fund V that yielded negative gross IRRs, most notably the West Coast Industrial Portfolio, of which the fund held 54.1 percent and Fund VI held 29.6 percent, according to the private placement memorandum for Fund VII, which was distributed to investors and seen by PERE. The firm had acquired the 95-property industrial portfolio for $2.75 billion from the California Public Employees’ Retirement System and RREEF in 2007 and financed the deal with about $2.45 billion of debt. The fund manager, however, defaulted on the loans earlier this year, and the properties were handed over to The Blackstone Group, which held both senior and junior debt backed by the assets.

Sources, however, said Walton Street currently is restructuring the debt for Fund V and is expected to return 90 percent of the fund’s capital to investors over the long term. The firm appears to have bounced back with Fund VI – which was generating a net IRR of 12 percent as of 31 March – and is targeting net returns of at least 16 percent to 18 percent for Fund VII, according to Illinois Teachers documents.

On behalf of Fund VII, Walton Street will pursue value-added and opportunistic investments in a range of commercial real estate sectors, with a focus on office and hotel properties. Targeted strategies include distressed debt, loan restructurings and recapitalisations; bulk transactions; purchases of vacant office and retail buildings in major high-growth markets; redevelopment and repositioning of upscale hotels; and targeted development in strong growth markets, according to Louisiana Teachers documents. 

The fund, which will use up to 70 percent leverage, will be 90 percent invested in the US, while the remaining 10 percent will be invested in Mexico, India, Brazil and Europe. Equity investments will range between $10 million and $100 million.