The real estate business within Goldman Sachs’ merchant bank is determined to capitalise on the growing investment opportunity presented by property debt.

Pre-2008, the Real Estate Group in Goldman Sachs’ Merchant Banking Division, also known as Real Estate Principal Area (REPIA), raised third-party capital for a series of equity investment funds. Since then, equity investment has been done through in-house capital and joint venture arrangements. The third-party fund money it now raises is channelled into lending to property, rather than buying it.

To secure the optimal debt deals, it has an advantage – the sheer size of its latest real estate credit vehicle. Broad Street Real Estate Capital Partners III (RECP III), which closed in January, has been scaled up to $6.7 billion, including leverage – around $2.7 billion bigger than its predecessor fund, closed in 2014, and more than double its maiden debt fund, launched 10 years ago.

The strategy is global, with European activity run from London by co-head of the merchant bank division’s Real Estate Group, Jim Garman, and managing director Richard Spencer.

“We like the risk profile of the investment opportunity and investor demand was strong,” says Garman. “Plus our firm wanted to increase its exposure to the strategy.”

For the vehicle, REPIA has raised $2.5 billion from third-party investors, with an additional $1.7 billion of the bank’s balance sheet capital committed to the fund. In addition, $2.5 billion of leverage matched the third-party capital in the form of term financing.

“There’s a competitive advantage in being able to originate and hold very large loans,” Spencer says. “The more capital we have, the more we’re able to do that.”

The Broad Street credit fund series, through which REPIA invests in senior loans against transitional properties or developments and subordinated debt against stabilised assets, has a track record in writing large loans, including some of the European market’s biggest recent mezzanine financings. The largest deals in RECP II hit the $300 million mark. On average, the loan size from the strategy across all funds in Europe is $134 million.

One investment banker Real Estate Capital spoke to says that although there are several organisations with the capacity to write large mezzanine cheques in Europe, they tend to be independent debt funds or private equity firms – REPIA is unusual among banks when it comes to its capacity to provide subordinated debt in such scale. REPIA’s shift from equity to debt funds makes sense, the investment banker adds, saying it is a more “natural habitat” for a bank.


Although the European lending market remains competitive, the size of Goldman’s credit vehicle allows REPIA to pick the spots where it sees interesting deals and lower levels of competition, translating into higher margins. “Whether it’s a senior loan or a mezzanine loan, we’ll target a return of somewhere between 8 percent and 10 percent. Looking at the whole portfolio level, that has historically meant an average blended return of 9 percent,” says Garman. “Meanwhile, returns have become tighter for lenders with origination capacity for more straightforward loans.”

Since 2008, when the Broad Street series was launched, 9 percent returns have been consistently achieved. “We are lending to the most sophisticated financial sponsors in the world,” adds Spencer. “They don’t borrow money at 9 percent lightly – we have to offer them a service, and that’s either the ability to lend in scale or to deal with a particularly complex situation.

“If we can deploy one of those competitive advantages – particularly size – we find that competition is thinner. We can do tickets of $300 million or $400 million. The number of people who can do that is extremely limited.”

RECP III generates gross returns of 16 percent, providing a net 13 percent to investors. To achieve this, the $2.5 billion of third-party equity was matched by fund finance, borrowed at a rate of around 3 percent.

“We think the amount of leverage is conservative and appropriate,” says Spencer. “It’s a term commitment for the full life of the underlying loans, so we don’t have maturity mismatches. There is a floating rate coupon, as with the loans, so there is no interest rate mismatch.”

The facility, which is cross-collateralised by 40 loan investments, has been provided by several European pension funds that have long-term relationships with the merchant bank, having provided financing across several of its strategies previously.

“Other funds use leverage, but take individual loan level leverage on a repo basis. That creates maturity mismatches and mark-to-market risk. I think the term nature of our fund’s financing is fairly unique,” Spencer says.

Being part of Goldman Sachs, with a merchant banking division managing $85 billion of assets, of which around 17 percent represents real estate, has helped REPIA to raise its latest wave of capital. Third-party equity in RECP III is $700 million higher than in the previous fund, which raised $1.8 billion of limited partner capital by its final close in May 2014.

The $2.5 billion raised in the new fund comprises around 60 percent institutional investors and 40 percent high-net-worth individuals and family offices, from across Europe, the US, Asia-Pacific and the Middle East. Investors include the Korean pension fund Construction Workers Mutual Aid Association, which has committed $35 million to the fund, according to Real Estate Capital data.

In addition to this fundraising, the New York-headquartered merchant bank has committed $1.7 billion of balance sheet capital to the vehicle – its largest-ever investment in a real estate fund. In the last fund, Goldman represented 15 percent of every investment, now increased to 25 percent.

The attractive risk profile of real estate credit led Goldman to increase its exposure to RECP III, Garman says. At the same time, investor demand was strong, Spencer adds, meaning the vehicle could have been bigger still.“I think investors like that we put our money where our mouth is,” he argues. “From our perspective, it’s a bit different. We like the investment returns and the economics of this strategy come from earning a return on how the dollar is invested, rather than fees.”


REPIA has closed on four investments – three in the US and one in Europe – for RECP III, accounting for $1 billion of the fund’s $6.7 billion capacity. The firm also has three additional deals in the pipeline that would bring the fund’s total capital outlay to $1.5 billion.

In 2017, REPIA’s real estate credit business did three deals in Europe and invested around $600 million. It contributed €250 million to one of the largest mezzanine loans seen last year in Europe: a €500 million junior debt facility to fund Blackstone’s purchase of OfficeFirst Immobilien – the former IVG’s German office portfolio – for circa €3.3 billion through RECP II.

“With OfficeFirst, Blackstone was competing with an IPO alternative. They had to know they could finance it and they called us. Within a few days we told them we could do it,” Garman says. “We were able to say very quickly this was right. It had the size, scale and complexity, the right sponsors and the assets, so we said yes.”

Another key deal for the same sponsor – Blackstone – was the €340 million of mezzanine financing for the acquisition of the Sponda platform in Finland. The mixed-use portfolio of prime properties required a debt facility of €2.6 billion, one of the cycle’s largest real estate lending deals. REPIA has also teamed up recently with Morgan Stanley in the underwriting of a loan understood to be in the region of £400 million (€553 million) to refinance London & Regional’s £575 million Atlas hotel portfolio across the UK.

“Right now, in Europe, we’ve seen the opportunity in big mezzanine tickets, either a single asset or portfolio acquisitions, where we’re able to invest $100 million-plus of mezzanine debt in an individual transaction,” Spencer says. “In the senior financing market in Europe we definitely see more opportunity now than we used to, including more development opportunities.”

A rival mezzanine debt fund player operating in Europe notes the opportunistic profile of the fund, particularly for “exceptionally large mezzanine” deals. “If there was an opportunity to do more than €200 million, for instance, I suspect they would be able to do it. The reality, however, is that you don’t see too many transactions of this type in Europe. What Europe lacks is consistent scale, compared to the US, so for people who want to write big mezzanine cheques, there are fewer opportunities.”


Allocations to Europe, mainly in the UK, Ireland, Finland and Germany, have been increasing across REPIA’s credit fund series. The first fund in the series invested only in the US, while, in RECP II, Europe accounted for 20 percent of the fund’s investments. Over the last 12-18 months, European allocation is close to 40 percent, which is the target for RECP III.

“The reason Europe has become more relevant in this strategy is the way the European real estate markets are evolving post-crisis. We are getting to a point where we have seen that a lot of assets were pulled out of distressed situations, getting then repositioned and now moving to a point where they are more stabilised and properly capitalised,” Garman says.

Spencer notes the US opportunity has not been diminished in the meantime. “As Europe grows, it obviously feeds the need for more capital to tackle the opportunity. It’s not like Europe is growing and the US is decreasing – the US is growing too in terms of the opportunities we see,” he explains, adding that the firm has typically negotiated better protections or structures on the senior side in the US and on the mezzanine tranche in Europe.

Although the vehicle can invest globally, the challenge during the fund’s investment period – three years – is to find suitable deals, involving large transactions usually with private equity fund sponsors. This is likely to mean a select group of sponsors. “You want to work with sponsors who have the balance sheet and the capability to take down big positions, but we see a huge amount of equity being raised in the real estate private equity world,” Garman notes.

Global real estate ‘dry powder’ hit $1.7 trillion last year, according to CBRE’s Global Investor Intentions Survey 2017. The annual survey – of more than 2,000 fund managers, insurance companies, pension funds and sovereign wealth funds – revealed that investors have strong motivation to invest in real estate on the back of stronger economic growth, greater debt availability and growing investor confidence.

“We think there’s going to be a larger amount of assets changing hands over the coming years, a huge amount of transaction volume. And some of that will be the bigger packages with these large sponsors,” Garman adds. “Our job is to pick the ones where we think we can be a capital provider.”

The property credit business of REPIA, however, does not run a “buy-the-market” type strategy of high-volume business – rather, it takes a cherry-pick approach, Spencer says. Despite having the capacity to deploy $6.7 billion, the firm is aiming to write from 10 to 20 loans per year, as it identifies the best credit opportunities across the US and Europe.

“The intention is to have an investment vehicle which allows us to pick and choose our spots where we see interesting deals and lower levels of competition,” Spencer says. “The goal is to do something very simple: to lend money to clients of the firm, get a fee, get a coupon, get it paid back – that’s it. There’s no equity upside – this is a fixed-income strategy.”

From Whitehall Street to Broad Street

The global financial crisis hit the property funds business of Goldman Sachs’ merchant bank hard. According to a 2009 Wall Street Journal report, the bank in 2008 wrote down $2.1 billion of the $3.7 billion capital invested through its 2007 vintage Whitehall Street Global Real Estate LP fund.

The Whitehall business – which invested in equity rather than debt – suffered due to highly-leveraged pre-crisis investments. US regulation aimed at restricting banks’ investment into private equity funds also forced the business to consider the fund series’ future.

As a result, the bank shelved its Whitehall funds and focused its third-party investment management business on lending rather than buying. Not that the work on the Whitehall funds is done. In the last five years, the bank has been working to restore lost value. “We have been harvesting assets, but we still have a handful of remaining investments,” Garman says, adding the final Whitehall-owned property will be sold in the next two or three years. “We have rebuilt our equity investing business on balance sheet, it’s now much bigger than we thought it could be.”

Real estate equity investment by the merchant bank is now done through in-house reserves, as well as joint venture arrangements. Third-party fund capital, meanwhile, is reserved exclusively for the Broad Street debt fund business. Broad Street allows the merchant bank to co-invest, as with Whitehall, but Garman adds that the third-party investor base is more institutional than was the case with the equity funds. “The credit funds are a very different risk profile. This is a current yield credit product, rather than a long-dated equity multiple product. It works well for institutional clients of the firm,” he says.

Investing alongside clients is consistent with operating within a merchant bank, Garman adds: “We didn’t want to simply become an asset manager; we were a principal investor putting our own capital at work. So, we moved onto the balance sheet and started investing again.” Although there are no immediate plans to revive the equity funds business, Garman says this is something the firm regularly evaluates.