Best Response

REPE firms take money from institutional/private investors (pension funds, wealthy individuals, sovereign wealth funds, endowment funds) and invest in real estate on their behalf. So in essence, a REPE firm is getting capital from outside sources and using their RE expertise to generate returns for these outside sources.

Often times, REPE firms will partner up with other firms, perhaps a development company, a REIT, or another REPE firm to carry out an investment. The reason is due to synergies, economies of scale, or plain and simple the other party is needed due to their expertise (i.e. PREI is not a developer, so if their client wants to invest in industrial development, PREI will partner up with developer). The joint venture could be for one property in the portfolio/fund, or it could be for the entire portfolio.

The types of products these REPE firms offer differ, but usually you'll see commingled funds (lots of investors) or separate portfolios (one investor). The risk/property type that these REPE firms seek out depends on the firms' expertise and also what the client wants to invest in. The types of RE investments can differ, too...it could be real property, real estate securities, non-performing loans, etc. It all depends on the firm.

Last but not least, REPE firms make their money through fees (acquisition fees, Asset Management fees, disposition fees, etc). It's structured in a way that both parties (the investor and the REPE firm) make money as long as the investment performs.

Feel free to PM with any more questions.

 

To my knowledge, it is not as common for RE companies to acquire other RE companies as it is in other industries. However, it is very common for RE companies to acquire portfolios of assets (actual properties, or RE loans) from other companies. Think of it as when traditional companies “spin-off” divisions rather than selling themselves entirely.

 
okay24:

how common is it for a RE PE shop to purchase other RE companies (like a buyout fund)? Or why do they not?

This is a very good question. It definitely happened more in the boom, but they do still buyout or invest in corporations today. See Blackstone-Centro. Blackstone-Apple REIT. There's Equity International, who's active in emerging markets (see Advance Real Estate, an industrial company).

You're more likely to see these deals in lodging, such as Starwood-Intown Suites or Blackstone-Motel 6. Or other operation-focused areas; see M3 Capital Partners-Essential Living.

Again, crazy REIT buyouts are not occurring like they did in the boom.

EDIT: I was wrong about the reason. It is not happening as much, yes, but not for the original reasons I mentioned (basically availability of money). No, the money is there, but the reason we aren't seeing the traditional REIT LBO has to do with valuations. Because interest rates are pathetic and the stock market is chasing yield right now, any dividend-yielding stocks are being pushed up to richer valuations.

I do see certain REITs trading at a discount to NAV, but apparently those that I see are the exceptions (and/or the discount is not significant enough to attract the TPGs of the world)..

 

Does anyone know how recourse tends to work with REPE investments? You've got a fund--typically not a going concern, operational company--that makes the investments with typically owners or investors of the fund who have less than 25% ownership interest. I just spoke with a major real estate lender today who works mostly in RE construction financing for large, institutional investors, and this lender requires recourse.

Does anyone have any insight into how a typical PE fund might obtain non-recourse debt financing or how they provide recourse, especially on development/construction deals? It would be hard to imagine a General Partner providing personal recourse on a $100 million deal. Thoughts?

Edit: when my organization provides non-recourse financing it's usually to a stabilized project that has low LTV or LTC (65% or less) for a Borrower/Sponsor with a solid track record with our organization.

 
DCDepository:

Does anyone know how recourse tends to work with REPE investments? You've got a fund--typically not a going concern, operational company--that makes the investments with typically owners or investors of the fund who have less than 25% ownership interest. I just spoke with a major real estate lender today who works mostly in RE construction financing for large, institutional investors, and this lender requires recourse.

Does anyone have any insight into how a typical PE fund might obtain non-recourse debt financing or how they provide recourse, especially on development/construction deals? It would be hard to imagine a General Partner providing personal recourse on a $100 million deal. Thoughts?

Edit: when my organization provides non-recourse financing it's usually to a stabilized project that has low LTV or LTC (65% or less) for a Borrower/Sponsor with a solid track record with our organization.

Funds tend to not want to guarantee anything. If it's a development deal, the DEVELOPER and NOT the fund should, ideally, sign it.

But if needed, they will pledge something related to their own balance sheet or some sort of pool of assets that they've set aside.

Hell, I heard about a fund manager getting creative and going out to HNW individuals and offering a fee for them to put money into a "guarantee" pot. Didn't work, though.

 

Exactly.

Usually the sponsor/developer guarantees the loan. I've yet to see a deal that institutional equity does. They see so many deals they can be picky and don't need to take on the added risk.

I would add that it isn't uncommon for a third party to step in and pledge their balance sheet for a fee/equity stake in the project. Especially with small shop developers. The hard part is having the relationship with someone with enough money and faith in you to do so.

 

An interesting structure I saw was when a small-ish homebuilder doing a $20 million land development deal purchased a third party credit enhancement from the investment fund of a high net worth individual. The assets of the fund were about $100 million and were all from a single family. A chunk of the funds--maybe a quarter--were invested in "alternative investments," which included guarantying certain real estate deals. Unlike a federally regulated bank, which has to set aside certain funds when it issues letters of credit, this private group issued the guaranty and could still invest all of its assets without setting aside "reserves." It was expensive, but the homebuilder, if he pulls off the deal as he plans, will make for himself $3 million in about 2 years time. Not exactly shabby and certainly worth a hefty fee.

Edit: prospie, I just saw your reply--my Internet Explorer is acting up with WSO. Funny you mentioned that outside fee like I mentioned. My group accepted the 3rd party guaranty from the HNW individual. I just re-looked at the guarantor's balance sheet and it had $121 million liquid and the guaranty was for $3 million. I suppose it's all size relative.

 

Funny dc depositary, I mentioned a similar structure to you like a year ago and you basically called me a dumbass. Yes you can get people to guarantee your loan if you have to - happens often but you will pay for it. Though most funds wouldn't guarantee anything, that's what the operating partner is for.. if the operator can't get a loan he's not really much of a developer. expensive non recourse construction money is out there too

 

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