Crunch time for opportunity funds

  For a raft of opportunity funds launched following the onset of the global economic downturn, 2012 is crunch time. As investment periods expire, fund managers that raised capital in 2009 or before have just months left to deploy their cash after the flood of distressed stock expected for the past three years failed to materialise.   According to DTZ, around $216bn (£140bn) of global capital that was raised prior to 2009 is at risk of not being deployed before commitment periods come to an end. More than half of this “at risk” capital is in opportunity funds.   In its report, Opportunity Funds Running Out Of Time, DTZ ranked property funds by the amount of money they had left in their coffers. The agent found that of the top 10 funds by available capital, eight are opportunity funds. It also revealed that around half of this “at risk” capital is targeting Europe, the Middle East and Africa.   The impending deadlines and lack of opportunities, and the pressure to deliver returns of around 20%, have prompted a number of strategic – and linguistic – changes. The label “opportunity fund” has gone out of vogue with most vehicles now going by a “value” or “value-add” description.   A number of fund managers, such as Palmer Capital, have taken pre-emptive action to remain in the market.   In the middle of last year, the niche fund manager went back to investors and asked for an extension to its investment window, which was to expire in December 2011. It was granted and the fund now has until December 2014 to invest all of its £100m of equity.   Chief executive Alex Price said: “We explained to our investors that the investment window should be extended to allow us to buy what we felt would be better deals in 2012 and 2013 than we were seeing in 2011. We felt strongly that investors would do better by being patient, recycling the profits from earlier deals in the fund.”   Philip Cropper, managing director of real estate finance at CBRE, says investment managers can make the argument that to liquidate a fund in the current market would mean taking a hit on certain assets that have already been bought. Some “out-of-favour” assets can be worked further if the fund is extended, and the extra time provides the opportunity to buy into a depressed market and deliver further returns on capital.   However, winning an extension could come with concessions. Sources close to Morgan Stanley say it is on the verge of winning a one-year extension for its $4.7bn Morgan Stanley Real Estate Fund VII.   However, as part of the deal to extend the vehicle’s life until June 2013, it is set to return around $700m to investors and cut its fees. The fund is currently only $2.5bn invested ahead of a deadline in June this year.   A second course is to buy into alternative sectors. Managers such as Frogmore bought Britannia Parks, a 17-strong retirement park business, in 2009 through its Frogmore Real Estate Partners II fund. The £300m Mountgrange Real Estate Opportunity Fund has put its cash into joint ventures to back budget hotel chains and residential development finance. Moorfield and Blackstone have both recently invested in the logistics sector.   With time running out for some vehicles, an unofficial “strategy” of “panic buying” is also mentioned by market sources. But with banks set to push out more stock this year, there could be more assets to choose from.   “This year could be the year of the opportunity fund as the value of some secondary stock could fall by 10% or more in the first half,” says Chris Ireland, lead director for capital markets at Jones Lang LaSalle.   For others, capital raising is on the agenda again. However, managers’ abilities to raise follow-up funds will be closely linked to their success this time round, says Cropper. On top of this, investors are more wary about how they go into a fund and with whom they go in.   “By the end of this year, there will be clear winners and losers,” he says.   Extension, redemption, transformation or termination?   An Estates Gazette survey of 35 opportunistic vehicles launched since 2007 reveals that only two have fully deployed their equity before its investment period expired. Rockspring’s UK Value Fund had spent its entire £336m by June 2010 and Threadneedle fully invested its £60m before selling the assets to deliver a fund-level IRR of around 24%.   A further two investment managers, Palmer Capital and Morgan Stanley, said they had negotiated an extension of their investment period to avoid having to return unspent cash to investors.   Only three fund managers – Mountgrange, Catalyst and Tristan – confirmed that vehicles they run have an investment period expiry this year. However, based on an average investment period of three years, another four of the funds surveyed could reach the final months of investment in 2012.   The survey found that only 18 of the 35 funds launched since 2007 still exist in original form. A number of firms, such as London & Stamford Property and New River Retail, have converted to REIT status, while others, such as F&C REIT’s Devonshire UK Opportunities Fund have been delayed by a tough fundraising environment.   Fund manager Rowan Asset Management abandoned its Capital Plus Fund because it could not find the deals within the two-year investment period. “We had the mandate, structure and committed equity in place but didn’t find any opportunities which fitted the fund criteria either because of too much risk or lack of appropriate return levels,Ó says chief executive Nick Jacobs.   Opportunity funds   Palmer Capital Development Fund II   Manager Palmer Capital   Launched Sept 2006   Equity raised £120m   Equity invested £70m, and £50m of recycled capital yet to invest   Debt Less than 5%   Investment period expiry Extended from December 2011 to December 2014   Fund life expiry Extended from December 2013 to December 2015   Mountgrange Real Estate Opportunity Fund   Manager Mountgrange   Launched August 2007   Equity raised circa £300m   Equity invested £190m   Debt 38% LTV   Investment period expiry November 2012   Fund life expiry April 2017   Moorfield Real Estate Fund II   Manager Moorfield   Launched Oct 2007   Equity raised £389m   Equity invested Undisclosed but Moorfield confirms there is still equity to invest. Investments include Audley Retirement; Brindleyplace, Birmingham   Debt Gearing limit is 75%   Investment period expiry Undisclosed   Fund life expiry October 2015, extendable to 2017   Catalyst European Property Fund   Manager Catalyst Capital   Launched Oct 2007   Equity raised €228.5m (£188bn)   Equity invested €175.1m. Investments include Alpha Tower, Birmingham; Stratford Centre, London (50% jv); New Bridge Street, London   Debt Undisclosed   Investment period expiry June 2012   Fund life expiry Undisclosed   Blackstone Real Estate Partners Europe III   Manager Blackstone   Launched March 2008   Equity raised €302bn   Equity invested Undisclosed, but deals include a 50% stake in British Land’s Broadgate Estate   Debt Undisclosed   Investment period expiry Undisclosed   Fund life expiry Undisclosed   Highcross Regional UK Partners III   Manager Highcross   Launched March 2008   Equity raised £436m   Equity invested More than £300m in 25 deals including UK Land Estates portfolio. Around £100m left to invest   Debt Less than 60%   Investment period expiry September 2013   Fund life expiry Sept 2018   Frogmore Real Estate Partners II   Manager Frogmore   Launched March 2008   Equity raised £195.3m   Equity invested 60% invested across six deals   Debt Determined on a project-specific basis   Investment period expiry Undisclosed   Fund life expiry 2017 plus optional two-year extension   Rockspring UK Value Fund   Manager Rockspring   Launched March 2008   Equity raised £336m   Equity invested More than £400m with another £100m earmarked for capex. Investments include shopping centres in Aberdeen, Blaydon, Falkirk, Gloucester, Grays, Romford, Southampton   Debt Around 35%   Investment period expiry June 2010   Fund life expiry 2017 Morgan Stanley Real Estate Fund VII   Manager Morgan Stanley   Launched March 2008   Equity raised $4.7bn (£3bn) in June 2010   Equity invested $2bn   Equity left to invest $2.7bn   Debt Undisclosed   Investment period expiry June 2012 – 12-month extension approval imminent   Fund life expiry End of 2018   European Property Investors Special Opportunities Fund   Manager Tristan Capital Partners   Launched May 2008   Equity raised €788m (£650m)   Equity invested 90% invested in pan-European property   Equity left to invest Up to €500m including recycled equity   Debt Up to 65%   Investment period expiry May 2012   Fund life expiry May 2016   Carlyle Europe Real Estate Partners III   Manager Carlyle   Launched June 2008   Equity raised €2.2bn (£1.8bn)   Equity invested €1.9bn in investments including Soapworks and Piccadilly Place, Manchester   Debt Up to €9bn   Investment period expiry Undisclosed   Fund life expiry Undisclosed   LaSalle European Ventures III   Manager LaSalle Investment Management   Launched June 2008   Equity raised Target of €1.25bn (£1bn)   Equity invested Ongoing   Europa Fund III   Manager Europa Capital   Launched June 2008   Equity raised €600m   Equity invested Undisclosed but includes One Piccadilly Gardens, Manchester   Debt Deal-by-deal basis   Investment period expiry Undisclosed   Fund life expiry Undisclosed   Benson Elliot Real Estate Partners III   Manager Benson Elliot   Launched 2010   Equity raised $505m (£329m)   Equity invested Undisclosed across four deals   Debt Up to 75%   Investment period expiry Undisclosed   Fund life expiry Undisclosed   Orion European Real Estate Fund III   Manager Orion Capital Managers   Launched July 2008   Equity raised €1.28bn (£1bn)   Equity invested Undisclosed across eight investments in Europe   Debt Up to 75%   Investment period expiry Undisclosed   Fund life expiry Undisclosed   Threadneedle UK Opportunities fund   Manager Threadneedle   Launched March 2008   Equity raised £60m   Equity invested Fully invested £160m of assets now sold, crystallising a fund level IRR of over 24%   Debt 65%   Brockton Capital Fund II   Manager Brockton Partners   Launched March 2010   Equity raised £500m   Equity invested Undisclosed Investments include The Mailbox, Birmingham. Up to £350m equity is still available   Debt Determined on a project-specific basis   Investment period expiry Undisclosed   Fund life expiry Undisclosed   Curzon Capital Partners III Fund   Manager Tristan Capital Partners   Launched 2011   Equity raised €323m (£266m) Ð expects to raise €500m total   Equity invested 30% committed to European assets   Debt Up to 60%   Investment period expiry June 2014   Fund life expiry June 2019