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Zell's EI converts fund amid consolidation – Exclusive

Equity International, the Chicago-headquartered firm co-founded by real estate mogul Sam Zell, will invest a proportion of the capital raised for its sixth fund via a club structure. Meanwhile, it has embarked on a consolidation exercise which has seen about 10 departures. 

Equity International, the Chicago-based private equity real estate firm led by property magnate Sam Zell, is consolidating its operations and restructuring its latest fund, PERE can reveal.

The firm, which orchestrates investments mainly in Latin America and other emerging markets, has ceased fundraising for its latest opportunistic vehicle, ZEIF VI, after garnering around $300 million towards its original $650 million target, multiple sources have confirmed. Launched initially in 2015, the fund’s commitments included a $125 million investment from the Teachers Retirement System of Texas (TRS). The firm declined to comment on the fundraising.

EI’s decision is notable in part because it has halted its efforts at a point where the fund has raised a little less than half of its target and of its predecessor. Fund V attracted $650 million in 2011, but, according to a TRS spokesperson, was generating a return of -4.94 percent, as of March.

In another significant shift of strategy, the firm will no longer be operating ZEIF VI as a blind-pool discretionary fund, but will instead invest a portion of the existing capital on a non-discretionary, deal-by-deal basis that is more akin to a club format instead. This decision is understood to have been made in response to investors’ preference towards committing capital to specific, pre-defined deals in Latin America as opposed to a blind pool fund, the sources said.

In this case, the investors’ desire for a different sort of governance arrangement was amplified by emerging markets volatility. Latin America’s powerhouse, Brazil, for example, has been mired in a protracted period of recession and political uncertainty that has sent ripples across the region. An IMF survey released in April has forecasted a 0.5 percent contraction in the entire region’s growth this year, marking two consecutive years of negative growth that was last seen only during the debt crises in 1982 to 1983.

“The environment has definitely played a role,” the source close to the firm told PERE, noting that while deals had picked up recently, it had been difficult to find transactions fitting EI’s risk-return profile. “Emerging markets in the last four years have been a mess and investors have not been interested.”

PERE has also learned that shelving the fundraising plans was part of the reason for the departure of Heidi Levin, the senior vice president in charge of capital market activities, including investor relations and fundraising, earlier this year.

Levin was among the ten to twelve employees to have left since the beginning of the year as the firm experienced some turnover and executed a consolidation exercise. These include long serving senior executives such as Brad Beanblossom, a senior vice president responsible for originating, executing and managing investments; Aalok Virmani, senior vice president, tax, who was in charge of cross-border tax planning and reporting for the company and its portfolio; and Ravi Hansoty, the firm’s senior vice president and head of Asia Pacific who was hired end of last year.

Equity International has confirmed these departures to PERE. In a written statement it said “a certain amount of turnover is to be expected; not every person fits into every organization”, while further adding that its “investment team is as large as it has ever been at EI, and its C-level team is intact.”

However, many of these vacant senior positions may not be filled up. Levin’s investor relations role for instance is now being handled by the firm’s chief financial officer.

Equity International has also merged its back-office operations, including accounting and tax functions, with Equity Group Investments, another private investment firm owned by Zell. Indeed a few of the employees who left Equity International are said to have joined EGI. A source has told PERE that eventually the EI’s entire office is likely to be relocated to a few floors below into a space where EGI operates.

An EI spokesperson confirmed the staff migration, terming it as the “creation of a shared services function”, but refuted any plans of combing the two offices entirely.

“Chief executive officer Tom Heneghan has been with Sam since 1990. When he joined EI as CEO in 2012, he committed to leveraging his relationships within the wider Zell organization to enhance the company’s capabilities and efficiencies, and to build a team that shared the company’s vision,” said the spokesperson on the rationale for the merger. “Over time he concluded that synergies in some of EI’s back office areas would be possible and more efficient. Many firms our size have moved to outsource these functions to third parties. We are very fortunate to be able to retain direct control over the work while still achieving cost savings. Ultimately this benefits our investors.”

Launched in 1999, Equity International has about $1.2 billion in assets under management, according to a year-end filing with the US Securities and Exchange Commission.