LCN Capital Partners, a new fund manager focusing on sale-leaseback transactions, will be coming to market next month with its first two commingled real estate funds. One will target $200 million in commitments to pursue corporate sale-leaseback investing strategies in North America, and the other will target €200 million in equity for a similar strategy in Europe, according to sources familiar with the matter.
The two vehicles will seek to invest in ‘primary’ sale-leaseback transactions, which involve directly purchasing a corporate real estate asset from the owner-occupier and negotiating a lease with the seller. The funds have pre-specified pools of investments that will focus on operationally critical assets occupied by companies for lease terms of at least 15 years. LCN Capital will target investments valued between $5 million and $100 million, with most falling in the $20 million to $50 million range.
LCN Capital – co-founded one year ago by Edward LaPuma, the former head of international investments at WP Carey, and ex-Goldman Sachs executive Bryan York Colwell – declined to comment on the funds or fundraising. Sources, however, said the firm, which currently has a staff of 11 between its New York and London offices, has set up two distinct funds to allow investors more flexibility in terms of geographic, currency and regulatory exposure.
LCN Capital’s strategy will be a hybrid of corporate credit and real estate, in which the firm will underwrite both the credit of the company occupying the property as well as the asset itself. “There’s a large and looming wall of pre-crisis debt,” LaPuma told PERE. “There’s a need for alternative, non-bank finance solutions as a result of the massive contraction in the lending markets.”
Indeed, the volume of sale-leaseback activity is rising significantly at a time when companies are beginning to expand but other capital sources from stocks, bonds and banks are not readily available. In the US, for example, sale-leaseback transaction volume for assets valued at $2.5 million and above rose from $1.9 billion in 2010 to $3.4 billion in 2011, according to Real Capital Analytics.
For deal flow, LCN Capital is said to be relying on established client relationships that LaPuma built during his years at WP Carey, which is the largest firm focusing on sale-leaseback investments. Unlike WP Carey, however, the fund manager will be targeting institutional investors rather than retail clients. The challenge is that many institutional clients still are learning about the sale-leaseback market, and most funds targeting sale-leaseback deals have focused on ‘secondary’ transactions, or subsequent sales of an asset that has been acquired and leased back to a company, explained Colwell. “There really haven’t been a lot of [primary] vehicles for them to invest in,” he added.
First investors in the funds are expected to include insurance companies, family offices, endowments, foundations and possibly pension funds. LCN is partnering with G2 Investment Group, a New York-based asset manager established in 2008 by Guggenheim Partners co-founder J. Todd Morley, and is working with G2's Forbes Private Capital Group on capital raising and fund formation. G2 also is providing additional operational support to LCN.
PERE understands that the funds, which are targeting gross returns of 15 percent to 16 percent and net returns of 10 percent to 12 percent, are scheduled to hold a first close during the summer and a final close by the end of the year. Additionally, the firm is expected to make quarterly income distributions as it begins investing capital.