Goldman Sachs raises $4.2bn for global RE credit fund

The equity haul included the largest balance sheet investment the New York-based firm has made in a real estate fund.

Goldman Sachs has held a final close on its latest real estate credit fund, Broad Street Real Estate Credit Partners III, Private Debt Investor’s sister publication PERE has learnt.

The real estate group in the Goldman Sachs Merchant Banking Division raised $2.5 billion of limited partner equity for the vehicle and matched that with $2.5 billion of debt, which will take the form of term, as opposed to asset-level, financing. Additionally, the New York-based firm committed $1.7 billion of balance sheet capital to the vehicle – its largest-ever investment in a real estate fund – and of the $2.5 billion in LP equity, $200 million came from Goldman partners and employees. All told, RECP III will have $6.7 billion in total capital to invest.

MBD’s real estate group raised $993 million in Partners III’s first close in April, according to a filing with the Securities and Exchange Commission. Investors were 60 percent institutional and 40 percent high net worth and spanned Europe, the US, Asia and the Middle East. Limited partners included the Korean pension fund Construction Workers Mutual Aid Association, which committed $35 million to the fund, according to PERE data.

The fund did not have a hard-cap. As for a target, “if you asked us a year ago, we would have said we were looking at $2 billion to $2.2 billion of LP equity,” Alan Kava, the New York-based co-head of MBD’s real estate group, said. “We felt we stayed true to what the initial intent was and true to our initial communication with investors.”

Similar to its predecessor funds, RECP III will target direct originations of both senior and mezzanine loans backed by high quality assets in major markets in the US and Europe, ranging in size from $100 million to more than $500 million. Targeted returns – in the mid-teens on a gross basis and low-teens on a net basis – also will remain the same.

One major difference between RECP III and its predecessor vehicle was the size of Goldman’s co-investment. “Goldman upped significantly its investment to the fund, which is a reflection of how attractive we viewed this opportunity,” said Peter Weidman, MBD’s global head of real estate credit. “In the last fund, Goldman was 15 percent of every investment. In this fund, it’s going to be 25 percent.”

RECP II amassed a total of $4 billion plus leverage, including $1.8 billion in equity, in its final close in May 2014.

The first fund in the series, Goldman Sachs Real Estate Mezzanine Partners, is now fully harvested, while RECP II is now fully invested, with returns in line with targets. To date, MBD’s real estate group has closed on four investments – three in the US and one in Europe – for RECP III, accounting for $800 million of the fund’s $6.7 billion. Additionally, the firm has three additional deals in the pipeline that would bring the fund’s total capital outlay to $1.2 billion.

“There is currently a large opportunity in the US to provide senior mortgage construction loans on assets that are being developed or redeveloped, as there’s a dearth of capital focusing on that space in the US,” said Kava. “In Europe, it’s a little different. We’re currently seeing more activity on the classic mezzanine side and portfolio lending, on assets in one country or pan-European. The opportunities however, could change during the life of the fund.”

While RECP III will be focused on both the US and Europe for investments, it will not have a targeted geographic allocation, Kava said. However, he added that RECP II was 20 percent allocated to Europe, and with RECP III, “we’d love it to be north of that, but there are no guarantees.”

Weidman saw the fund’s strategy of originating and holding whole loans to be a competitive advantage, compared with competitors that originate the entire loan and then selling off the A-note, or senior piece. “That resonates with borrowers because it provides certainty and ease of execution at closing to only be negotiating with one lender,” he said. “A lot of projects we’re lending against are complicated projects that change over time. If the changes [the borrowers] want to make improve the value of the collateral and increases our chances of getting repaid, we’re willing to work with them. They don’t have to call different lenders.”

Goldman has closed RECP III at a time when real estate debt fundraising is on an upswing. In 2017, debt funds accounted for 28 percent of the total private real estate capital raised – up from 14 percent in 2015 and 18 percent in 2016 – and the highest such percentage during the 2011-2017 period, according to PERE data.

“There’s significant fundraising taking place in the debt space and we think that it will continue,” said Kava. “Debt funds are taking the place of traditional lending sources like banks, CMBS, insurance companies or other types of investment vehicles that for a variety of reasons don’t exist anymore. There’s more capital being raised by alternative sources like us.”

MBD is the division through which Goldman executes the bulk of its long-term principal investing activity, which encompasses equity and credit opportunities across corporate, real estate and infrastructure strategies. Founded more than 25 years ago, MBD has raised more than $180 billion for investment in these strategies, including $15 billion for real estate credit since 2008.