Private-equity giant TPG has closed its first high-risk real estate fund, raising more than $2 billion in commitments at a time when big investors’ appetite for real-estate risk is increasing.
TPG, a relatively new player in real-estate investment, began fundraising for the dedicated real-estate fund it just closed in the first half of 2014, with a goal of $1.5 billion to $2 billion.
Reaching that goal was challenging, even for a firm as big as TPG, which has a total of $75 billion in assets under management.
“This took roughly around the time we expected, maybe a bit longer,” said Kelvin Davis, the senior partner at TPG who is co-head of its real-estate business. “We had to build some relationships from scratch, and understandably that takes time.”
Investors fled from real-estate funds after many got clobbered during the downturn, and have been returning to the business slowly, with a strong preference for firms with long, successful track records in real estate.
Without such a track record, the San Francisco-based firm has had to prove itself. TPG’s real-estate unit began investing in 2009, through one of the firm’s broad buyout funds as well as special accounts set up for individual investors.
Fundraising is getting easier because pension funds, insurance companies, sovereign-wealth funds and other institutions increasingly are seeking the kind of yield the riskiest real-estate funds—known as “opportunity funds”—are offering. These investors preferred trophy office buildings and other so-called core assets in the early stages of the recovery. But the prices of these properties have soared in the past three years, driving yields down.
Strengthening economies in Europe and the U.S. and loosening credit markets have increased the likelihood that risky strategies pay off.
“There’s increased confidence in real estate among institutional investors,” said Andrew Moylan, head of real estate for Preqin, which tracks private-equity fundraising.
So far this year, real-estate opportunity funds have raised $47.7 billion, a post-2008 record that already has outpaced 2014’s $34.5 billion, but still way lower than the $74.2 billion in 2008, according to Preqin. Overall, private-equity real-estate funds, including those focusing on less risky assets, have raised $87.2 billion this year, compared with $108 billion for all of 2014 and $138.1 billion in 2008, Preqin said.
TPG is becoming a bigger player in real estate at a time when the firm has been pondering a possible initial public offering, following rivals like Blackstone Group LP and KKR & Co., according to people familiar with the matter. To appeal more to stock investors, those firms diversified their earnings from the boom-and-bust nature of corporate buyouts by building up businesses that invested in debt, hedge funds and real estate.READ ALSO – London rises dramatically above New York, Hong Kong, in global prime property league
Lately real estate has been a particular focus. Blackstone’s second-largest business is now its real-estate unit, which managed $91.6 billion as of June 30. Another TPG rival, Apollo Global Management LLC, in August agreed to buy most of property mogul Nicholas Schorsch’s real-estate empire in a deal that more than doubled the size of its real-estate segment to about $27 billion under management.
In an interview Monday, James Coulter, TPG’s co-founder, said the firm’s push into the real-estate business isn’t tied to a possible IPO. Rather it is part of a strategy of “organically growing” TPG’s alternative investment platforms and taking advantage of market opportunities.
While TPG is relatively new to raising real estate opportunity funds, Mr. Davis is a veteran in the business. He co-founded one of the leading real-estate private-equity firms, Colony Capital, in 1991 and worked there until 2000, when he joined TPG. He then ran the firm’s North American corporate business until 2009.
Since 2009, TPG’s real-estate unit has made about $2.7 billion in real-estate investments through the firm’s buyout fund and special accounts set up for investors including the New Jersey Division of Investment and Ivanhoe Cambridge, the property investor for Canadian pension manager Caisse de Depot et Placement du Quebec. TPG also has committed about $600 million of the opportunity fund it just closed, which is focusing on deals in Europe and North America.
Mr. Davis declined to specify the new fund’s return objective. Opportunity funds typically shoot for annual returns of more than 15%.
TPG has distinguished itself from other firms in part by investing in real-estate companies rather than individual properties. For example, in 2014 it invested in LifeStorage and has helped build it into one of the country’s top-10 self-storage companies, with close to six million square feet of space.
“The industry is enormously fragmented” and is seeing “relatively muted supply growth,” said Mr. Davis. Large players also have major competitive advantages because of their ability to brand and market, he added.
TPG also owns P3 Logistic Parks, a pan-European industrial platform. Partly based on that experience, the new fund is buying Trigranit, a Hungary-based developer that owns property throughout Central and Eastern Europe, particularly Poland.
TPG is bullish on Polish real estate because of its “emerging middle class that becomes more consumptive as they gain wealth,” Mr. Davis said.