Category: Real Estate Private Equity Funds

PERE 50 and SEC Registration

Private Equity Real Estate has released its ranking of the top 50 real estate private equity fund managers. As I have done in the past, I parsed the list to see which managers are registered with the Securities and Exchange Commission as investment advisers.

1 Registered Blackstone
2 Registered Brookfield
3 Registered Starwood Capital Group
4 Registered Lone Star Funds
5 Registered The Carlyle Group
6 Exempt Reporting GLP
7 Registered Pacific Investment Management Co.
8 Registered AEW Global
9 Registered GreenOak Real Estate
10 Registered Tishman Speyer
11 Registered Oaktree Capital Management
12 Registered CBRE Global Investors
13 Registered Angelo Gordon
14 Registered Ares Management
15 Registered Rockpoint Group
16 Registered CIM Group
17 Registered Crow Holdings Capital Partners
18 Registered Rialto Capital
19 Registered Cerberus Capital Management
20 Registered Morgan Stanley Real Estate Investing
21 Registered LaSalle Investment Management
22 Registered Westbrook Partners
23 Exempt Reporting Gaw Capital Partners
24 Registered Harrison Street Real Estate Capital
25 Registered Walton Street Capital
26 Registered KKR
27 Registered Bridge Investment Group
28 Registered Colony Northstar
29  Exempt Reporting ESR
30 Overseas Meyer Bergman
31 Overseas Kildare Partners
32 Registered  Invesco Real Estate
33 Exempt Reporting Partners Group
34 Registered KSL Capital Partners
35 Registered Exeter Property Group
36 Registered Orion Capital Managers
37 Registered PGIM Real Estate
38 Registered DRA Advisors
39 Overseas Keppel Capital
40 Exempt Reporting Aermont Capital
41 Registered DivcoWest
42 Exempt Reporting PAG
43 Registered Kayne Anderson Capital Advisors
44 Overseas Patrizia (including Rockspring Property Investment Managers)
45 Overseas Tristan Capital Partners
46 Registered  GTIS Partners New York
47 Registered Almanac Realty Investors
48 Registered Fortress Investment Group
49 Registered BlackRock Real Estate
50 Registered Northwood Investors

It’s a full boat this year. All 50 are (1) registered with the SEC as an investment adviser, (2) registered as an exempt reporting adviser, or (3) operate completely overseas outside of SEC jurisdiction.

There are good arguments to be made on both sides of the registration debate for real estate funds. The core requirement under the Investment Advisers Act is that the manager is giving investment advice about “securities.” Most of these real estate fund managers are truly focused on real estate and not securities. However, the discussion between what is and is not a security may be fun for the first week of your securities law class in law school. It’s not a fun discussion when trying to comply with regulatory requirements.

It looks like the “register” side of the debate has overwhelming won for the largest firms.

PERE Methodology

The PERE 50 ranking “measures private equity real estate firms by equity raised over the last five-year period. For this year’s ranking, the relevant period runs from January 1, 2013, to end of March 2018. Qualifying equity is raised for direct real estate investment through closed-ended, commingled real estate funds and co-investment vehicles that sit alongside those funds. The firm must have discretion over the fund’s capital, meaning club funds, separate accounts and joint ventures are excluded from the ranking. Further, as a ranking of private equity real estate firms, only funds with value-added and opportunistic investment strategies qualify. Strategies such as core and core-plus, as well as those not focused on direct real estate, like fund of funds, debt funds, and funds where the primary strategy is not real estate focused, such as general private equity, are excluded.”

Sources:

The Republican Agenda and Private Real Estate

Since President Trump is deep in private real estate, maybe there will be some good things coming to the industry during his administration. 

There were six major themes that President Trump campaigned on the most:

  1. Immigration and the wall
  2. Trade fairness
  3. Tax changes
  4. Healthcare changes
  5. Dodd-Frank changes
  6. De-regulation in general

Other than immigration, President Trump has proven himself to prefer to make policy through the 140 characters in Twitter, instead getting deep into the policy weeds. We need to look to Congress for a legislative blueprint, since President Trump does not seem to have one.

What does the Republican leadership in Congress want do? Specifically what do Paul Ryan in the house and Mitch McConnell in the Senate?

What can they convince the House and Senate to do? 

That is the big question right now with the American Health Care Act. The Republican house is torn between those who think the bill goes too far and those who think it doesn’t go far enough. Many campaigned on just the repeal part. Many others learned that what their constituents didn’t like about Obamacare is that is too expensive. The American Health Care Act only does one of those.

Speaker Ryan has promised a vote on the Republican healthcare bill on Thursday to coincide with the 7 year anniversary of the Affordable Care Act. We’ll see if Speaker Ryan is able to shepherd this very unpopular bill through the House and get enough votes.

Then what?

Most likely tax reform. Speaker Ryan published his “A Better Way” white paper in June of 2016. Unlike the American Health Care Act, legislators have been able to look at this already. Here are some of the highlights. 

  • Biggest change is the Border Adjustment Tax (unlikely to affect real estate directly.
  • Fewer tax brackets
  • Top rate of 33% for individuals 
  • Limit pass-through income from partnerships and LLCs to 25%
  • Lower corporate tax rate to 20%
  • Eliminate deductibility of interest expenses.
  • Individuals only taxed on half of their dividend and capital gains
  • Immediate cost recovery for investments instead of a depreciation schedule. (not clear on real estate)
  • Net Operating Losses can be carried forward and be adjusted for inflation
  • Eliminate the Alternative Minimum Tax,
  • Eliminate the estate tax
  • Eliminated Obamacare taxes (the last one is the healthcare bill)

President Trump mentioned removing favorable treatment of carried interest during the campaign. That is not Speaker Ryan’s blueprint. It’s been threatened before and survived.

After that, or during that, is financial de-regulation. Chairman Jeb Hensarling of the House Financial Services Committee has been working hard on his Dodd-Frank off-ramp for the last six years pushing bits of legislation through his committee and on to the House floor. The  Financial Choice Act has been floating around for a year and packages that work into one package.

“As the dust begins to settle on the post-crisis response, however, there has been a growing recognition that financial regulation has become far too complex and too intrusive and places too much faith in the discretion and wisdom of bank regulators.”

Here are some highlights:

  • Pitch is to help community banks.
  • Adjust capital requirements – removing Basel requirements
  • Make credit more available
  • New Bankruptcy code for financial institutions
  • Repeal FSCO’s Systemically Important Financial Institution designation powers
  • Reform Consumer Financial Protection Bureau
  • Federal Reserve Reform
  • Repeal the Volker Rule
  • Repeal Dodd-Frank registration requirements for private equity firms
  • Expand definition of accredited investor: Same income and net worth tests, but adds financial services experience or some sort of qualifying experience.

As much as the Republicans are campaigning against de-regulation the Financial Choice Act does not define “private equity firms” and requires the SEC to promulgate a new regulation to define it. SEC registration was on the edge during Dodd-Frank, The house version of the bill and the Senate version of the bill took opposite approaches on whether to subject private equity firms to SEC registration. During hearings, private equity kept being equated to leveraged buyouts that bankrupted companies and put people out of work to enrich corporate raiders.

 

I presented the above to PartnerConnect East 2017 yesterday. 

 

Sources:

A Better Way” white paper

The Next Real Estate Fund Manager To Fall

Scott M. Landress sponsored funds to invest in real estate private equity secondary transactions in 2006. When one of the funds got into trouble, Landress asked for additional fees. The fund advisory board said no. Landress later charged unauthorized fees for services provided by an affiliate.

SLRA’s fund management fee was based on the net asset value of the fund’s underlying investments. If you bought real estate in 2006, your net asset value dropped for a few years. The Liquid Realty Partners fund saw its net asset value decline by 94%.

Landress and SLRA were stuck with declining values and increased costs to manage those assets through the financial crisis. They had to deal with loan defaults and foreclosures and attempts at recapitalization.

Between 2009 and 2011 Landress asked the fund limited partners for more compensation. It should come as no surprise that they said no.

In early 2014, Landress withdrew £16.25 million from the fund for service fees related to acquisitions, dispositions and financing work performed by an affiliate of the general partner. The charge was 1.25% of thirteen transactions.

The service was provided through an oral agreement. It did not appear in the fund documents. It was not approved by the fund’s advisory board which is required for related party transactions. The charges were not shown as accumulated on the fund’s financial statements or disclosed to the auditors.

Landress wrote a letter to the fund’s limited partners telling them he was taking the fee. They were understandably upset. Both sides went into negotiation over these fees. The LPs tried removing the GP and stopping the payment.

Surprisingly, Landress sued the LPs for declaratory relief that he was entitled to the fees. The argument was that SLRA had to do all that additional work that was outside the scope of the management fee paid to the fund’s general partner. The LPs lawyered up and notified the SEC of the problem.

Landress and SLRA ended up returning the cash and Landress got barred from the industry.

Sources:

Want to Buy a Boston Skyscraper?

The old fraud was someone selling you the Empire State Building. A new company wants you to buy State Street Financial Center in downtown Boston. But it’s not a fraud; just a focused real estate investment.

state street financial

Commercial real estate involves big chunks of capital. Some of those investments will meet underwriting, some will be home runs, and some will be duds. There are very few investors who have the capital to invest in a diversified portfolio of real estate to even out the highs and lows. That was the lure of REITs. An investor could access to a diversified pool of real estate assets.

ETRE Financial is trying to go the opposite way and float a public offering of an interest in a single real estate asset. The firm would own half of a joint venture that owns the Boston skyscraper. You, the investor, would hold an interest in that one building.

This is ETRE’s second attempt at this structure. The first attempt was for 1201 Connecticut Avenue NW, Washington D.C.

State Street Financial Center is a 36-story office tower that has a million square feet of primarily office space and a five-level parking garage. The Property was developed in 2003 through a collaboration among the Gale Company, State Teachers Retirement System of Ohio and a Morgan Stanley real estate fund. The Property was named “Boston Building of the Year” by the Building Owners and Managers Association International, or BOMA, in 2003.

It’s a great real estate asset. But the value is tied to one lease. The building is rented to a single tenant: a subsidiary of State Street Financial. That lease expires in 2023, subject to two ten-year renewals.

You also have to deal with the mortgage financing that matures in 2017.

To me, it seems like the investment is very focused. You would want to make sure you like the credit of State Street, that you like the Boston office market, that you understand what could happen with the mortgage re-financing, and that you understand the effects of the lease extension and expiration. Again, this is the opposite of an investment in a diversified REIT or private real estate fund.

I think it’s an intriguing investment choice. Possibly, it could be an intriguing way for real estate funds to exit from investments.

Typically, I don’t think a single lease negotiation or extension wold be material non-public information. Changes to this lease would definitely be material non-public information and subject to insider trading abuse.

By the way, you can own a chunk of the Empire State Building, as part of the diversified REIT, Empire State Realty Trust.

Sources:

UPDATE: A prior version of this story indicated that this was the third attempt at this structure. The first filing was merely a template using an unnamed building in Manhattan.

When the Numbers Don’t Add Up

compliance and a calculator

Sometimes when you look at an investment opportunity, you run through the math and see that things don’t add up. That means it might be a fraud. Take a look at the offering of Bio Profit Series V, LLC detailed in an enforcement action by the Securities and Exchange Commission.

Assuming the SEC’s complaint is true, the fund was selling 10-year notes paying 6% per year with a bonus payment of 45% of the outstanding principal at maturity. That is not an outrageous return by itself. On top of that, the managing member receives a business operations and management fee of 7.5% of the proceeds from the note sale. (See item 15 on the Form D for the offering.)

The fund is supposed to be in the business of buying and making residential loans secured by first or second deeds of trust in California. How can the fund offer that kind of return when interest rates are below 6%?

The SEC lawyers laid out the math in the complaint. Bio Profit Series V would have to generate an average annual return of 12.2% per year to pay the annual return and bonus payment. It was the fourth fund raised by Yin Nan Wang and his Velocity Investment Group, all of which had promised returns that did not add up. (Apparently, Wang skipped over Series IV.)

According to the SEC complaint, Wang was using new investor money to pay old investors. He admitted to the ponzi scheme when talking to a company that originated loans for one of the Bio Profit funds.

Although the underlying investments may be in loans that constitute real estate, the interest in the funds are securities. That gives the Securities and Exchange Commission jurisdiction. It appears that all, or at least a large portion of the investors are from overseas. That may complicate matters.

What’s missing in the story of how the SEC found out about the alleged scam. It does not appear that any investors are complaining of lost money. Perhaps it was the person who was told it was a ponzi scheme. Perhaps that person used the SEC’s relatively new Tip, Complaints and Referrals Portal to alert them to the fraud?

Private Equity Real Estate 50: Which are Registered with the SEC?

pere 50

Private Equity Real Estate just released its ranking of the top 50 real estate private equity fund managers. As I have done in the past, I parsed the list to see which managers are registered with the Securities and Exchange Commission as investment advisers. (Disclosure: my company is on the list.)

1 The Blackstone Group Registered
2 Starwood Capital Group Registered
3 Lone Star Funds (Hudson Advisors) Registered
4 Colony Capital Registered
5 LaSalle Investment Management Registered
6 Tishman Speyer Registered
7 The Carlyle Group Registered
8 Goldman Sachs Real Estate Principal Investment Area Registered
9 Brookfield Asset Management Registered
10 MGPA Registered
11 Morgan Stanley Real Estate Investing Registered
12 CBRE Global Investors Registered
13 Westbrook Partners Registered
14 AREA Property Partners Registered
15 Angelo, Gordon & Co Registered
16 Prudential Real Estate Investors Registered
17 Shorenstein Properties
18 CapitaLand Overseas
19 Fortress Investment Registered
20 TA Associates Realty Registered
21 Oaktree Registered
22 Bank of America Merrill Lynch Global Principal Investments Registered
23 Walton Street Capital Registered
24 Northwood Investors Registered
25 Perella Weinberg Partners Registered
26 Lubert-Adler Real Estate Registered
27 AEW Global Registered
28 Beacon Capital Partners Registered
29 Orion Capital Registered (overseas)
30 Alpha Investment Partners Overseas
31 DRA Advisors Registered
32 KSL Capital Registered
33 ARA Asset Management Overseas
34 Rockpoint Group Registered
35 Niam Overseas
36 Hemisferio Sul Investimentos Overseas
37 Hines Registered
38 GI Partners Registered
39 Cerberus Capital Registered
40 GTIS Partners Registered
41 Invesco Real Estate Registered
42 Crow Family Registered
43 CIM Group
44 Rockwood Capital Registered
45 Berkshire Property Advisors Registered
46 Harrison Street Real Estate Capital Registered
47 GE Capital Real Estate
48 Kayne Anderson Real Estate Registered
49 Spear Street Capital
50 Stockbridge Capital Registered

 

PERE expanded the list this year from 30 to 50.  On the list, 41 of the top 50 are registered with the SEC as investment advisers. Of those not registered, 5 are overseas and likely are outside the scope of SEC registration requirements.

There are good arguments to be made on both sides of the registration debate for real estate funds. The core requirement under the Investment Advisers Act is that the manager is giving investment advice about securities. Most of these real estate fund managers are truly focused on real estate and not securities. However, the discussion between what is and is not a security may be fun for the first week of your securities law class in law school. It’s not a fun discussion when trying to comply with regulatory requirements.

The PERE 50 measures capital raised for direct real estate investment through commingled vehicles, together with co-investment capital, over the past five years.

Sources:

Which Real Estate Fund Managers Registered with the SEC?

Last year, I looked a the top 30 real estate private equity fund managers to see which were registered with the Securities and Exchange Commission. Given that we just passed the March 30, 2012 registration deadline, I thought I would update the list. (Disclosure: my company is on the list.)

1 The Blackstone Group Already registered
2 Morgan Stanley Real Estate Investing Already registered
3 Tishman Speyer  Registered
4 Colony Capital Already registered
5 Goldman Sachs Real Estate Principal Investment Area Already registered
6 Beacon Capital Partners  Registered
7 LaSalle Investment Management Already registered
8 The Carlyle Group Already registered
9 Prudential Real Estate Investors Already registered
10 Lone Star Funds Already registered
11 Westbrook Partners  Registered
12 AREA Property Partners  Registered
13 MGPA  Registered
14 KK daVinci Advisors
15 CB Richard Ellis Investors Already registered
16 Shorenstein Properties
17 Rockpoint Group  Registered
18 Lubert-Adler Real Estate Already registered
19 Citi Property Investors Already registered
20 Walton Street Capital Already registered
21 Starwood Capital Group Already registered
22 Bank of America Merrill Lynch Global Principal Investments Already registered
23 TA Associates Realty Already registered
24 GI Partners  Registered
25 Lehman Brothers Real Estate Private Equity Already registered
26 KSL Capital  Registered
27 Aetos Capital Already registered
28 Angelo, Gordon & Co Already registered
29 Hines  Registered
30 Grove International Partners  Registered
Other real estate fund managers
Crow Family Registered
Heitman Already registered
Northwood Registered
Rockwood Capital  Registered
RREEF Alternative Investments Already registered

 

If you do the math, now 28 of the top 30 are now registered with the SEC as Investment Advisers.

There are good arguments to be made on both sides of the registration debate for real estate funds. The core requirement under the Investment Advisers Act is that the manager is giving investment advice about securities. Most of these real estate fund managers are truly focused on real estate and not securities. However, the discussion between what is and is not a real estate security may be fun for the first week of your securities law class in law school. It’s not a fun discussion when trying to comply with regulatory requirements.

The PERE 30 measures capital raised for direct real estate investment through commingled vehicles, together with co-investment capital, over the past five years.

Sources:

Are Real Estate Fund Managers Registered with the SEC?

Last year, I looked a the top 30 real estate private equity fund managers to see which are already registered with the SEC. The 2011 version of the PERE 30 just came out, so I decided to look at the list again.   (Disclosure: my company is on the list.)

It was mostly re-shuffling, but three new names were added to the list. One is registered as an investment adviser and the other two are not. Of the three that fell off the list, two were registered.

1 The Blackstone Group Yes
2 Morgan Stanley Real Estate Investing Yes
3 Tishman Speyer
4 Colony Capital Yes
5 Goldman Sachs Real Estate Principal Investment Area Yes
6 Beacon Capital Partners
7 LaSalle Investment Management Yes
8 The Carlyle Group Yes
9 Prudential Real Estate Investors Yes
10 Lone Star Funds Yes (Hudson Advisers)
11 Westbrook Partners
12 AREA Property Partners
13 MGPA
14 KK daVinci Advisors
15 CB Richard Ellis Investors Yes
16 Shorenstein Properties
17 Rockpoint Group
18 Lubert-Adler Real Estate Yes
19 Citi Property Investors Yes
20 Walton Street Capital Yes
21 Starwood Capital Group Yes
22 Bank of America Merrill Lynch Global Principal Investments Yes
23 (new) TA Associates Realty Yes
24 (new) GI Partners
25 Lehman Brothers Real Estate Private Equity Yes
26 (new) KSL Capital
27 Aetos Capital Yes
28 Angelo, Gordon & Co Yes
29 Hines
30 Grove International Partners
x -off the list Heitman Yes
x-off the list Rockwood Capital
x-off the list RREEF Alternative Investments Yes

 

If you do the math, now 18 of the top 30 are already registered with the SEC as Investment Advisers. I expect to see several more in the “yes” column before the registration deadline under Dodd-Frank. The question is whether that deadline will be July 21, 2011 or sometime in the first quarter of 2012.

The PERE 30 measures capital raised for direct real estate investment through commingled vehicles, together with co-investment capital, over the past five years.

Sources: