Brookfield Asset Management has held a $3 billion final close for its fifth real estate debt fund, Brookfield Real Estate Finance V, through which the firm has the ability to lend up to 20 percent in Europe.
The Toronto-based alternative asset manager launched the fund in 2016 and held a first close in July of that year, according to a filing with the Securities and Exchange Commission. By June, the firm had raised a total of $2.43 billion, according to the SEC.
Unlike with the previous funds in its debt fund series, which have been North America-focused, Brookfield also has the ability to lend up to a fifth of BREF V’s capital in Europe.
BREF V attracted 60 investors, including a slew of new institutions. Approximately 50 percent of the fund’s investor capital came from Canada, 17 percent from the US, 13 percent from Asia and 6 percent from Europe.
Limited partners in the fund include the New York State Teachers Retirement System and South Carolina Retirement System Investment Commission, each of which earmarked up to $100 million in November 2016 and June, respectively. The firm is also understood to have raised $150 million to $200 million from Korean investors that included KB Insurance and Lotte Insurance, as well as other limited partners that invested through a fund of funds with Meritz Asset Management. Additionally, Brookfield made a $400 million commitment to the fund through its publicly traded real estate platform, Brookfield Property Partners.
Brookfield Private Advisors and KB Investment & Securities, the investment bank subsidiary of Korean financial services company KB Financial Group acted as placement agents for the fund, according to an SEC filing.
BREF V is the largest real estate debt fund to have closed this year, followed by AXA Investment Managers – Real Assets’ Commercial Real Estate Senior 10, which raised $1.76 billion in January, and PGIM Real Estate’s Pramerica Real Estate Capital VI, which attracted $1.33 billion, according to Real Estate Capital data.
BREF V is more than double the size of its predecessor, which collected roughly $1.5 billion in 2014. Brookfield managing partner Andrea Balkan, who oversees the BREF series, said that the increase in size was the result of both greater demand from investors that are seeking both high cash-on-cash and strong risk-adjusted returns, as well as strong dealflow in the real estate debt space. She also noted that having a larger real estate debt fund was a competitive advantage.
“There are a lot of firms raising mezzanine debt, but they’re generally smaller funds,” she said. “When you get to larger sizes, there tends to be less competition. The larger assets are often higher-quality types of real estate, located in central business districts, which are the markets we generally tend to invest in.”
Through the new fund, Brookfield will continue to execute the same value-added strategy in the series, which primarily focuses on originating whole loans for well-located real estate assets, syndicating the senior loan to a third party and holding the mezzanine tranche for the fund. The firm will lend primarily on US assets across property types, with an emphasis on office.
The firm had invested 20-25 percent of the fund’s capital at press time.
Given the larger size of the fund, Brookfield has set a four-year investment period for BREF V, a year longer than those of the previous funds in the series. The firm will collect a 1.4 percent management fee on invested capital and 15 percent carried interest above a 6 percent preferred return, with a 50-50 catchup, according to a June fund presentation from RSIC. The fund has a gross return target of 12-13 percent and a net return target of 9-10 percent, the RSIC documents said.
In addition to its larger size, the fund also stands out from its competitors because of its 15-year track record. “There are very few debt funds that have been in the market consistently – before, during and after the global financial crisis,” said Balkan. “Investors are also looking for debt funds that are part of a larger organization that also has operational expertise. We have that.”
Since 2004, the firm has invested more than $3.6 billion in equity in 84 loans through the BREF funds, generating an aggregate gross return of 1.35x and net return of 1.28x as of September 2016. “The prior funds have been able to consistently achieve attractive returns,” the pension system wrote in an investment summary.
The sole underperforming fund in the series was BREF II, which was invested near the peak of the market and returned a gross 8.8 percent and net 5.3 percent as of September 2016. Nonetheless, that fund still returned a 1.25x gross multiple and 1.18x net multiple of invested capital.