Shorenstein, Divco to Market New Investment Funds
Submitted March 2, 2010, 10:10 AM
Based on expectations of strong buying opportunities later this year, two San Francisco-based money managers with strong investment reputations plan to begin raising equity for their latest investment funds much earlier than is their typical practice.
Shorenstein Properties and DivcoWest Real Estate Investments both plan to start marketing new commingled funds in the next several months—even as they continue to invest equity from earlier funds, according to sources with direct knowledge of their activities. Their goal is to ensure that they will have an unbroken stream of equity to invest as the year wears on. Typically, fund managers wait until they have invested most of the equity in a current fund before they begin raising money for their next fund.
The total equity raise for Investors 10 is projected to be in the neighborhood of $1 billion. For Realty Investors Nine, Shorenstein raised $2.06 billion of equity ending in 2007. This included a $154 million equity investment from Shorenstein itself. The investment period for this commingled fund lasts until May of 2011.
Among numerous other assets, Fund Nine owns a junior interest in a construction loan related to the first phase of Sunnyvale’s Moffett Towers, a speculative office development by the Jay Paul Co. that consists of three office buildings with nearly a million square feet of space. It also held a mezzanine loan against the Santa Clara Towers, a 418,000 square-foot, two-building complex in the city of Santa Clara generally north of U.S. Highway 101 adjacent to Great America Parkway. The fund recently became the owner of the complex.
This, despite the fact that it has $400 million of equity still left to invest for its Market Street Capital Partners fund. The company raised $650 million for Market Street ending in 2006. One of its largest investors with a $100 million commitment was the California Public Employees’ Retirement System. In mid-2009, the most recent benchmark available, the pension fund estimated the fair market value of its investment at $29.4 million. At that time, nominal returns before fees were paid were 7.8 percent for the quarter and negative 41.3 percent for the year. CalPERS classified the fund as opportunistic.
In its new fund, DivcoWest is likely to pursue a value-add strategy, a very similar approach to its previous fund. The company plans to look for properties nationwide with a bias towards West Coast markets, likely including the San Francisco Bay Area. Technology-centric markets would be a big theme of the investment strategy.
DivcoWest owns eight properties in the Bay Area, including the 105,200 square foot 101 Lincoln in Foster City and the 400,000 square foot Lake Park Business Center in Santa Clara.
Most real estate fund managers expect to raise less capital for their follow-on commingled funds this year. Many institutional investors have adopted a cautious approach for their 2010 investment capital after having been burned by losses in real estate in the last 18 months or so. Shorenstein typically attracts a wide range of investors to its commingled funds, including college and university endowments and foundations. It also invests on behalf of pension funds and high net-worth individuals.
Shorenstein also intends to follow a similar investment strategy as it has pursued in previous investment funds, including a single-minded focus on office buildings. Most of the transactions are expected to be buying existing properties that can be improved by a new leasing strategy or new management. There could be some deals that involve providing mezzanine debt to a property.
Shorenstein will be looking for transactions across the county. One of its targeted markets will be San Francisco. Others include New York City, Los Angeles and Washington, D.C.
