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INTELLECTUAL PROPERTY: Second chance

A number of private equity real estate firms are nearing the end of their investment period for large funds they raised during or immediately after the global financial crisis. With a decent amount of capital left in each, the decision on how to proceed may be telling as to the firm’s confidence moving forward. PERE Magazine, December 2011/January 2012 issue

In the 1953 film noir Second Chance, a prizefighter with lethal fighting ability accidently kills an opponent, an event that significantly rocks his life. As the film progresses, he fights his demons before deciding to take to the ring again.

Not to be taken literally, of course, a number of global private equity real estate firms –prizefighters in their own right – have reached decision time as well. These firms, which raised significant amounts of equity during or immediately after the global financial crisis, are being confronted with a choice as the bell threatens to chime on these vehicles and they still have a sizeable amount of capital yet to be invested. Should they ask their investors for an extension of the investment period or return the uninvested capital? Is there another choice for these firms?

Beyond the immediate implications, the path chosen by these firms may say much about each firm’s outlook on their business. A decision to return the uninvested capital and launch a new fund may demonstrate a firm’s confidence in its strategy and its relationship with investors, while the choice to extend the investment period may be seen as a lack of confidence in the ability of a firm to raise new capital.

Earlier this year, LaSalle Investment Management chose to call time on its third Asia opportunity fund and return capital to investors. Following the expiration of the investment period for LaSalle Asia Opportunity Fund III in June, at which stage the Chicago-based firm had invested approximately $2.4 billion of the fund’s $3 billion of committed capital, it decided to embark on a fresh fundraising programme for a successor vehicle rather than seek an extension for the remaining capital.

Like other firms that raised large funds as the global financial crisis was taking effect, LaSalle found itself sitting on the sidelines for the best part of two years. Jack Chandler, the firm’s former head of Asia, told PERE in 2010 that it was keen not to make investments under pressure. “The worst thing a fund manager can do is rush,” he said at the time. “Going slower can be a drag on performance, but our partners have been very appreciative that we waited to restart making acquisitions until we felt the risk/return proposition made sense.”

Although LaSalle came up $600 million short on the investment front, I would think most of the fund’s investors appreciated the fact that the firm was looking out for their best interests and didn’t rush to put capital to work. They likely also appreciated the fact that the firm had the confidence in itself to return the uninvested capital and move forward with a new vehicle.

I suspect the proof of that will come sooner rather than later, as LaSalle has begun preliminary marketing for LaSalle Asia Opportunity Fund IV, promoting the vehicle to existing investors first. Aiming to corral some $750 million in commitments, the firm is targeting a first closing of up to $300 million for the first quarter of 2012.

On the other side of the coin was Morgan Stanley Real Estate Investing (MSREI), which has decided seek an extension of the investment period for Morgan Stanley Real Estate Fund (MSREF) VII Global, one of the largest private equity real estate funds ever raised. Having agreed internally to press ahead, the firm’s senior executives will now try to convince the fund’s LPs ahead of a vote later this month (see D-day for G7, page 6).

Having invested less than $2 billion of the $4.7 billion raised for MSREF VII Global at the time of its closing in May 2010, MSREI requires more time than the scheduled end of the investment period in June in order to put the remaining capital to work. A two-thirds majority vote by capital would see the firm granted an extension of 12 to 18 months and, crucially, additional breathing space to invest into a global real estate market still reeling from the effects of the credit crunch. A green light from investors also would provide a further chance for MSREI to continue to show the private equity real estate world that it still is a potent opportunistic investing force.

Complicating matters for MSREI is the impact of incoming regulation in Europe and the US, particularly the Volcker rule, which could make it much harder for financial institutions like Morgan Stanley to manage and co-invest in its real estate funds, at least in their current form. Still, there is an undercurrent of confidence within the firm itself that the necessary approvals to extend the fund will be granted and that it will be able to work around any regulatory restrictions.

Others that will need to make such choices soon include Brookfield Asset Management, whose $5.5 billion Real Estate Turnaround Consortium is schedule to expire at the end of this month, and MGPA, whose $3.9 billion MGPA Asia Fund III is approaching the end of its investment period. For its part, Brookfield plans to release the members of the club vehicle from their uninvested commitments, which stood at $3.1 billion at the end of the first quarter. That said, the firm will try to lure some of those commitments to its $4 billion global real estate opportunity fund, which was launched earlier this year. MGPA, meanwhile, is understood to have received an extension on a portion of its uninvested capital but still is deciding how it wants to proceed with the remainder.

The prizefighter in Second Chance ends the film still fighting for his life. As these firms follow through with their decisions, it will become clear which ones will find themselves fighting for their lives and which won’t need to.