ULI Chicago Young Leaders’ three-part discussion series continued with its second session on Wednesday, February 11, 2015. The discussion, led by Jay Weaver and Robert Bloom of Walton Street Capital, focused on the real estate private equity industry. They discussed the history of real estate private equity, the forming of Walton Street, and perspectives on the current market.  The sold-out event included over 30 young professional members of ULI looking to broaden their knowledge of the industry and engage in open discussion with some of Chicago’s top executives.

Jay and Robert began the discussion by presenting a brief background of real estate private equity, which emerged as a result of tax law changes in 1986 that caused public real estate syndications to fall out of favor with investors. A capital void in the 1990s prompted traditional hedge funds and investment banks to enter the real estate arena. An exponential growth in real estate private equity ensued though 2008. Today, most prominent investors include pension funds, university endowments, and sovereign wealth funds. Foreign capital represents the fastest growing source of capital.

Walton Street was formed in 1994, initially raising opportunistic funds to acquire distressed real estate. Now preparing to launch its 8th fund, Walton Street continues to target opportunistic real estate in high-barrier-to-entry areas – properties that will become institutional quality assets once stabilized. These properties are then marketed to core investors (a process described by Jay and Robert as “manufacturing core”). Walton Street, which primarily invests in the main food groups (office, retail, multifamily, hotel), takes a hands-on approach to its investment strategy. To do so, it has a substantial asset management team. The majority of its acquisitions are direct investments without operating partners. Exceptions are development opportunities, smaller assets in secondary markets, and specialty property type acquisitions.

Generally, most opportunistic funds are not sector specific. By contrast, sector-specific funds are more likely to feature core assets. Closed-end funds typically carry a term of seven to ten years with a loose goal of doubling the equity investment.  Sources of capital in the current market have adapted for a variety of reasons. On the domestic side, employers are shifting away from defined benefit plans toward defined contribution plans. The liquidity required by defined contribution plans poses a challenge to the closed-end fund model. On the flip side, the market has experienced increased real estate investment demand from foreign capital sources.

The YL Small Group Discussion Series concludes on February 23, 2015 with Related Midwest.  The series is currently sold out but there is a wait list.  Contact ULI Chicago for more information.

Authored by Michael Kaplan, Integra Realty Resources