If there’s doom-and-gloom about commercial real estate investing, then the secondary market hasn’t heard about it yet.
Velocis, a Dallas-based private equity real estate fund, blew past its third-round fundraising goal on Friday by raising more than $170 million in capital commitments from various investment partners, according to the firm. The third-round fundraising total exceeded the firm’s target by a whopping 70 percent.
Velocis plans to use the new capital to acquire limited partnership interests in real estate funds and real estate assets through the private secondary market, the firm said in a statement. Capital partners for the firm include corporate pension funds, endowments, foundations, private offices and high-net-worth individuals.
By using secondary markets, where a private fund purchases positions, or the stake of another investor, in existing real estate funds and assets, Velocis expects to gain further exposure into the commercial real estate market without needing to wait on future cash-flow opportunities or complicated property closings.
“There’s the diversification benefit, [as] within secondary investing you can buy interest in lots of different funds and gain exposure to hundreds of underlying assets,” David Seifert, a partner at Velocis, told CO. “In a secondaries fund, we’re able to get exposure to hundreds of properties without having to raise billions of dollars.”
Another benefit is buying into the mature interest of the investment, so the cash flow is immediate, together with purchasing stakes in the fifth or sixth year of a 10-year fund, he added.
Velocis was founded in 2010 and has already closed two real estate secondary funds
“We’ve had a great track record. The first two funds have outperformed expectations on returns, and they’ve had a lot of early distributions, which has been great,” Seifert said. “Our investor base and other investors have seen what we’ve seen, which is pretty limited competition, pretty big discounts for smaller real estate secondaries.”
The distress in the capital markets, specifically the higher interest rate environment, has played into the hands of private equity firms like Velocis, giving them an opportunity to pull capital out of the traditional banking system and place it into secondary market investments that can immediately go to work for investors, Seifert said.
“As it stands right now, I think investors can see that real estate has been written down, and that usually can be good for a secondary buyer because you’re going to buy the interest after the GPs [general partners] have taken the value hit,” he explained.
The current Velocis fund – called Velocis Secondary Partners III – is 20 percent deployed, with the bulk of the fund expected to be deployed over the next 18 months, with roughly 80 percent of investments targeting U.S. real estate assets and the remaining 20 percent looking abroad, according to Seifert.
Asset classes Velocis favors include industrial and hospitality, while the firm remains bearish on office and cautious toward multifamily, Seifert said.
“We’re more bullish on industry, as we’re seen rents hold up well. Vacancy rates across the country still are at historic lows,” he said. “It’s generally been a banner year for industrial.”
Seifert noted that hospitality has also held up throughout the last year, as many lease terms in the asset class are correlated to inflation. He noted that most hospitality real estate is priced at higher cap rates than many other asset classes, so property values and transaction volumes have remained steady even amid the increase in interest rates.
“So far it’s done well and we see that continuing,” he said. “At least in the short term.”
Brian Pascus can be reached at [email protected]
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