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Blackstone Group LP (BX)
<http://www.bloomberg.com/apps/quote?ticker=BX:US>and Carlyle
Group <http://topics.bloomberg.com/carlyle-group/> are leading a record
number of private-equity managers aiming to raise real estate funds as the
world’s top buyout firms accelerate an expansion beyond corporate takeovers.


Blackstone, the biggest private-equity firm, is planning to raise its next
real estate fund, with a target of about $10 billion, later this year.
Carlyle is in the process of raising a new fund for U.S. property deals,
said a person briefed on the plan who asked not to be named because the fund
is private.

The two are among 439 private-equity real estate funds seeking a combined
$160 billion, the largest number on record, according to London-based
researcher Preqin Ltd. KKR & Co. last month hired its first head of real
estate, naming former Goldman Sachs Group Inc.
(GS)<http://www.bloomberg.com/apps/quote?ticker=GS:US>executive Ralph
Rosenberg to the post. The firms are betting they can
produce profits in a still choppy market because their capital is locked up
for long periods, usually a decade, allowing them to make improvements and
wait out short-term price swings.

“There’s a whole world of problems out there and properties need capital to
be maintained and to grow,” KKR’s Rosenberg said in an interview. “New
capital is going to have to solve these problems, because there’s not a
broad liquid market to restructure real estate like there was in corporate
debt.”

‘Lot of Distress’

The 35-year-old partnership has no immediate plans to raise a standalone
real estate fund, instead planning to use capital available through its
existing buyout and debt businesses, according to a person familiar with the
firm’s strategy.

Blackstone, created in 1987 by Stephen
Schwarzman<http://topics.bloomberg.com/stephen-schwarzman/>and Peter
G. Peterson <http://topics.bloomberg.com/peter-g.-peterson/>, has the
largest real estate business of the big private-equity houses, with $33.2
billion under management at the end of 2010. Real estate last year surpassed
the New York- based firm’s private-equity business, which has $29.3 billion
under management.

The company in February agreed to pay $9.4 billion to buy the U.S. malls of
Australia’s Centro Properties Group
(CNP)<http://www.bloomberg.com/apps/quote?ticker=CNP:AU>in its biggest
acquisition since 2007. Its deals last year included the
purchase of 180 warehouse properties from Denver-based ProLogis
(PLD)<http://www.bloomberg.com/apps/quote?ticker=PLD:US>and
investments in hotel chain Extended Stay Inc. and mall owner General
Growth Properties Inc. (GGP)<http://www.bloomberg.com/apps/quote?ticker=GGP:US>

Carlyle, based in Washington, had $10.2 billion in real estate assets under
management as of the end of last year, with funds dedicated to investing in
Asia, Europe <http://topics.bloomberg.com/europe/> and the U.S. Carlyle’s
fifth U.S. real estate fund, started in 2006, totaled $3 billion, according
to its website.

Wall Street’s Exit

“A lot of the private-equity guys and real estate guys are looking at this
and realizing there’s a lot of distress out there,” said Steve Coyle, chief
investment officer of Global Realty Partners, the unit of New York-based
Cohen & Steers Inc. that invests in private real estate funds.

Some Wall Street funds have revamped or exited their real estate businesses
in the wake of losses incurred during the global credit crisis. Those
businesses, some of which got established in the early 1990s with the
Resolution Trust Corp.’s sale of distressed loans from the savings and loan
crisis, also face a new regulatory environment that limits some riskier
investments.

Goldman Sachs’s leveraged Whitehall real estate funds suffered losses when
the credit crisis halted the flow of cheap debt financing and depressed
property values starting in 2007. Stuart
Rothenberg<http://topics.bloomberg.com/stuart-rothenberg/>,
the former head of property investment, left at the end of 2008 after 21
years. In October, Goldman hired Jeffrey A. Barclay from ING Clarion
Partners to lead a new business within asset management that will focus on
lower-risk commercial real estate, mainly in the U.S.

Goldman’s Losses

Goldman, also based in New York <http://topics.bloomberg.com/new-york/>,
additionally has a mezzanine lending fund for real estate, which has
gathered $2.6 billion in commitments since 2009, according to the firm’s
website.

Lehman Brothers Holdings Inc., the largest underwriter of mortgage-backed
securities at the market’s peak in 2007, filed for bankruptcy in 2008 and is
liquidating its assets. In June 2010, it sold the management
contract<http://topics.bloomberg.com/management-contract/>for its real
estate funds to a group of former executives.

Morgan Stanley’s top real estate fund executives, including Jay Mantz, Sonny
Kalsi and John Carrafiell, left during the past three years. John Klopp and
Olivier de Poulpiquet were named last September to run the real-estate
investing business.

Diminished Competition

Greg Fleming <http://topics.bloomberg.com/greg-fleming/>, who runs the
asset-management business, told employees in January that the firm “remains
fully committed to the real estate investing business.”

The New York firm raised $4.7 billion for its newest global real estate fund
last June, the biggest real estate fund to close since 2008. The amount is
less than half what Morgan Stanley had targeted initially. The fund was
among bidders for the U.S. malls of Centro Properties.

The diminished competition has helped public real estate funds, so-called
real estate investment trusts, attract $47.5 billion in capital in 2010, the
second-highest amount on record. The largest amount raised was $49 billion
in 2006, according to the National Association of Real Estate Investment
Trusts.

Private-equity backed real estate funds will have to convince investors that
they can top returns of REITS, after the sizeable fees the firms charge
investors, usually around 1.5 percent of assets and 20 percent of profits
above a certain threshold. REITs typically charge between half a percent and
1 percent of assets. They are also more transparent and more liquid.

Competing With REITs

The Bloomberg BI NA REITs index, which tracks 124 members, gained 30 percent
in 2009 and 29 percent in 2010. Private-equity real estate funds had an
average annual loss of 16 percent for the three years ended in September
2010, according to Preqin. They gained 0.1 percent in the 12 months ended in
September.

“Anyone who’s invested in REITs has done very well,” said Jerome Gates, who
in March joined Hamilton Lane, the Bala Cynwyd, Pennsylvania-based firm that
helps institutional investors pick managers. “For long-term investors, now
is a good time for private equity to put money to work, but investors need
to be prepared to bounce along the bottom for a while before seeing
significant improvement.”

Blackstone’s first stand-alone real estate fund, Blackstone Real Estate
Partners I, made investments from September 1994 to October 1996. That fund
returned investors 2.8 times their invested capital, giving an annual rate
of return of 40 percent, according to Blackstone’s most recent annual report
to the U.S. Securities and Exchange Commission.

Hilton Worldwide

Subsequent funds haven’t been able to match those returns, with the second,
third and fourth funds delivering an annual 19 percent, 21 percent and 16
percent, respectively. The fifth and sixth funds, which includes
high-profile investments such as Equity Office Properties Trust and Hilton
Worldwide, have average annual returns of 7 percent and 6 percent so far.

Hilton may file for an initial public offering as soon as this year,
according to people familiar with the matter, a sign that returns for the
funds may improve. After a 35 percent loss in 2009, Blackstone’s unrealized
value in real estate funds gained 61 percent in 2010.

“We are extremely well positioned to play a major role in this, and we
expect to continue to aggressively deploy capital,” Schwarzman said March 8
on a conference call with investors. “I think from just talking with people
in the marketplace on a regular basis that a lot of investors are looking
for a way to take advantage of this asset class.”

‘Looking Good’

Values of apartment complexes, office buildings, hotels and other commercial
properties are rebounding as the economy recovers and investors look for
higher yields than assets such as corporate bonds offer. U.S. commercial
property prices rose 4.2 percent from an eight-year low during the five
months ended January, according to the Moody’s/Real Commercial Property
Price Index released March 22.

“We’re well into the recovery in the prime markets in the U.S. and that
recovery has started to expand into secondary markets around the country,”
said Dan Fasulo <http://topics.bloomberg.com/dan-fasulo/>, managing director
at Real Capital Analytics Inc., a New York-based real estate research firm.
“Real estate is looking good versus other asset classes.”

Some smaller, more specialized real estate investors are shying away from
raising new pools for equity real estate investments. Santa
Monica<http://topics.bloomberg.com/santa-monica/>,
California-based Colony Capital LLC has no immediate plans to raise a new
equity fund, Chairman Thomas Barrack said in an interview last month. Colony
has a publicly traded real estate debt fund called Colony Financial Inc.
(CLNY) <http://www.bloomberg.com/apps/quote?ticker=CLNY:US>, which has
returned 1.8 percent in the past 12 months.

Barrack Has Doubts

Private-equity’s forays into real estate may be less lucrative and more
difficult in coming years for a number of reasons, Barrack said. For one,
institutional investors are pressing for more opportunities to co-invest,
circumventing fees private-equity funds charge. Some pensions, including
several Canadian groups, have their own teams dedicated to making direct
real estate investments.

“The next couple of years will be a period of more modest returns, harder
work and more attention paid to ‘value added,’” Barrack said.

The larger firms, all of which have either gone public recently or are
planning to do so, say real estate is an important area of growth as they
seek to diversify their sources of income in a bid to win over public
shareholders.

Blackstone went public in 2007, just before the financial crisis brought
buyouts to a halt. KKR last year gained a listing in New York, and Apollo
Global Management LLC, the private- equity firm run by Leon
Black<http://topics.bloomberg.com/leon-black/>,
last month raised $565.4 million in an initial public offering. Carlyle may
pursue an IPO this year.

Apollo

TPG, the private-equity firm run by David Bonderman and Jim Coulter, handles
its real estate investing from its broader buyout fund, a $19.8 billion pool
raised in 2008. It may weigh raising discrete real estate funds in the
future, according to two people familiar with TPG’s plans who asked not to
be named because the discussions are private. The firm, whose real estate
efforts are managed by Colony co-founder Kelvin Davis, has made deals
including the $955 million purchase of homebuilder Taylor Morrison Inc.
announced March 31.

Apollo, based in New York, has created a group devoted to real estate
investing and had assets of $6.5 billion in that unit as of the end of last
year, according to filings related to the public offering. The firm in
November bought the real estate management group of Citigroup Inc., adding
$3.6 billion in assets.

$10 Billion Fund

Raymond Mikulich, former co-head of Lehman’s real estate investments, joined
Apollo to run its North American property business. Joseph Azrack, Apollo’s
global head of real estate, has been expanding the business since he joined
the buyout firm from Citigroup in 2008. Apollo also has a REIT with about $1
billion under management called Apollo Commercial Real Estate Finance Inc.
(ARI) <http://www.bloomberg.com/apps/quote?ticker=ARI:US>

Even with some of the competition diminished, raising new funds won’t be
easy after the credit crisis and plummeting property values soured pension
funds and other investors on putting more money into real estate,
particularly higher-risk vehicles.

“I think the only one who has the shot at it is us,” Blackstone President
Tony James said Feb. 3, when being asked if a competitor could raise a
similar-sized fund as the $10 billion pool Blackstone is seeking. “But I
don’t think even for us it’s going to be easy, frankly.”

‘It’s Tough’

Lone Star <http://topics.bloomberg.com/lone-star/> Funds, a Dallas firm that
buys nonperforming loans backed by real estate and mortgage lenders, has had
to scale back its fundraising ambitions. The firm, led by John
Grayken<http://topics.bloomberg.com/john-grayken/>,
in November asked investors for six more months to raise two new funds.

Originally, Lone Star had hoped to gather $20 billion of capital commitments
for the two funds. Now, the firm probably will raise about $6 billion, said
Cohen & Steers’ Coyle.

Jed Repko, a spokesman for Lone Star, declined to comment.

“It’s tough raising capital but it’s starting to open up,” Coyle said in an
interview. “Everyone out there will tell you it’s tough.”


Arlene Busch

202-333-1880

abusch@rosemontseneca.co