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How PGIM raised 50% of its RE debt fund from new investors

The real estate investment arm of Prudential attracted first-time limited partners to the fund partly on strong past performance.

PGIM Real Estate has closed its seventh high-yield real estate debt fund in Europe, raising the largest vehicle of its type targeting the continent since the start of the pandemic.

PGIM Real Estate Capital VII closed with €1.82 billion in capital commitments, after targeting €1.5 billion, reports PDI‘s affiliate title, Real Estate Capital. It raised around half of its capital from new investors despite the pandemic having moved fundraising to a more virtual basis. The global investment arm of New Jersey-based insurer Prudential Financial snagged re-up capital shortly after the fund launched in 2020, with new capital from every region in the world mostly locked up in 2021, says Andrew Radkiewicz, global head of private debt strategy and investor solutions.

“We set out to attract new investors and diversify our client base,” Radkiewicz says. “Investors have increasingly moved beyond their real estate allocations and have invested into real estate debt from private credit and fixed income. This has significantly widened the investor universe, both geographically and by type.”

Investors in the fund include the Arkansas Teacher Retirement System, New York State Common Retirement Fund and Pennsylvania School Employees’ Retirement System, per data from affiliate title PERE. ATRS is a first-time investor in the series, having only previously invested in the manager’s core fund PRISA. NYSCRF and Pennsylvania SERS both invested in Fund VI in the series. PGIM Real Estate declined to comment on the investor composition of Fund VII relative to the predecessor funds in the series.

The firm used a couple of tactics to attract investors old and new. For existing investors, PGIM Real Estate leaned specifically on past performance of its fully invested funds. Fund I is fully realised, generating a 10.7 percent net IRR and 1.3x equity multiple. Funds IV and VI had generated 9.4 percent and 13.5 percent returns and equity multiples of 1.3x and 1.2x since March 2020, respectively, per documents presented to Pennsylvania SERS. Funds II, III and V do not have comparable performance data as they are separately managed accounts.

For newer relationships, Radkiewicz’s team addressed how the firm was navigating covid and what key issues it was focusing on internally, including communication about specific investment portfolios. As 2021 started to offer optimism, late-stage commitments were driven by the predecessor funds’ improving performance. The market rebound also presented new investment opportunities to attract additional capital.

“The combination of these factors attracted strong investor interest through 2021 to the final close,” Radkiewicz says.

The firm follows recent real estate debt fund closes by Brookfield and Madison Realty Capital. The sizes of the three, all exceeding $2 billion raised, showcase a significant investor appetite for real estate credit. PGIM Real Estate and Madison also recorded around 50 percent new investors, proving that the virtual pivot will not stop managers from expanding their client bases.

PGIM Real Estate is continuing a similar strategy from its previous fund. The manager has been consistently focused on living sectors, traditional residential as well as student and senior living.

It has also been making a concerted effort to increase its logistics and industrial exposure and is being tactical in office – focusing on assets with low vacancy and located in liquid markets – and e-commerce and supply chain-adjacent strategies such as cold storage. The fund, which is about one-third deployed, already has originated mezzanine loans on a cold-storage portfolio in the UK and an office property in Dublin, with PGIM Real Estate also providing preferred equity with the latter.

Radkiewicz: fundraising benefitted from a growing number of investors moving from real estate into real estate credit

With its new fund, PGIM Real Estate will originate senior debt, whole loans, mezzanine debt and preferred equity. The firm will have a specific focus on transitional debt for the conversion of properties into core assets, making them easier to exit on the back end. Loan sizes in PRECap VII currently range from €20 million to €130 million, Radkiewicz said, with the sweet spot for property values in the €50 million to €200 million range.

“That’s directly linked to how liquid that property is when the sponsor wants to sell on the back end,” Radkiewicz says. “If it’s too big, it’s narrowing the field; too small and it gets into the illiquid part of the market.”