Goldman Sachs' new property fund earmarks 50% for Europe

US banking group Goldman Sachs has raised $4.2 bn (€3 bn), including leverage, for its second global real estate finance fund - with 50% earmarked for Europe, according to Jim Garman, the London-based co-head of the merchant banking group’s real estate arm.

‘We don’t have a prescribed allocation but we expect it to be roughly 50:50 US/Europe given the pipeline of opportunities that we see in those markets. We expect the new fund to be fully-invested within about three years,’ Garman told PropertyEU.

The fund, Broad Street Real Estate Credit Partners II (RECP II,) has attracted interest from both institutional and private investors. Almost 60% of interest came from US investors, with Europe accounting for almost 40%. The remaining interest came from Asian investors.

RECP II will be managed by the real estate group within Goldman Sachs' merchant banking division. The new vehicle will enable Goldman Sachs to underwrite loans for borrowers in Europe for the first time, building on its track record in the US.

The $4.2 bn war chest comprises $1.8 bn in equity pledges from institutions and wealthy individuals, supplemented by the same amount of leverage as well as $600 mln of the firm’s own money, according to Garman. ‘The fund can invest in all European markets but we expect to look mainly at opportunities in the UK, Germany, France, Spain, Italy and Ireland,’ Garman said. ‘So far, the fund has underwritten loans in the US. We will lend against most asset classes – in our first fund, we’ve made loans against residential, office, hotel and retail properties,’ he added.

Goldman Sachs is launching this fund now due to improving fundamentals in the European debt market, Garman said: ‘The debt market is improving,’ Garman said. ‘However, a lot of the available capital is for lower-risk, core opportunities, whereas our strategy is to provide sponsors with larger loans on more complex assets. The volume of deals is going up, so the overall need for financing has increased. As a result, we think there’s room for a strategy like ours.’

RECP II will build upon the strong performance of Goldman Sachs' first fund, which invested over $3.5 bn in high quality loans, according to Alan Kava, co-head of MBD’s real estate investing group. ‘We are thankful for the continued support of the repeat investors from our first fund and are excited by the strong group of new investors that have expressed confidence in our strategy and the talented team we have in place,’ Kava said in a statement.

The difference between RECP II and GS Real Estate Mezzanine Partners, which raised $2.6 bn in 2008, is that RECP II has a mandate to invest in Europe and not just the US. Goldman Sachs held a first close in November and has so far invested more than $500 mln in five loans in the US - two senior mortgage loans and three mezzanine loans.

NOT A DEBT INVESTOR
The new fund will make senior loans and mezzanine loans backed by high-quality commercial real estate, to fund acquisitions, refinancings and recapitalizations. It is not a loan-to-own fund, nor is it seeking to buy distressed credit. Target returns are likely to be between 7% and 10%, rising to mid-teens with leverage. The fund will underwrite loans of between $100 mln and $200 mln, although it can go higher. It is aiming to build up a diversified pool of investments in both senior and mezzanine loans collateralized by high quality real estate assets.

‘The flexibility to invest across the capital structure and against all major asset classes is a distinct competitive advantage in creating unique financing solutions for our borrowers,’ said Peter Weidman, the managing director overseeing RECP II for MBD. ‘Since our first closing we have already invested over $500 mln and we continue to see an attractive pipeline of investment opportunities in both the US and Europe.’

Since its inception more than 25 years ago, Goldman Sachs has operated its merchant banking division as an integral part of the firm, raising over $125 bn. With eight offices in six countries around the world, the merchant bank division is one of the largest managers of private capital globally.