By Jon Peterson
New York City-based KKR has begun to market to investors the KKR Real Estate Partners Americas III commingled fund. The targeted capital raise for the fund is $3 billion, as written in a board meeting document for the New Mexico State Investment Council.
The San Francisco Bay Area will almost certainly be one of the targeted markets for the investments made by the fund. KKR already has a local presence in the region—Justin Pattner is a partner and head of its real estate equity for the Americas, and he works out of the company’s Menlo Park office. The fund manager also has other major operations in New York City and Houston, and the understanding is that it will look for suitable investment opportunities in the top 15 most populous metropolitan areas in the country.
New Mexico State Investment Council is a new investor into the commingled fund; the pension fund just recently approved a $75 million commitment. Other investors in the fund are comprised of a wide range of investors including sovereign wealth funds and other public and corporate pension funds.
KKR Real Estate Partners Americas III is considered a non-core investment fund. It will be looking to invest in assets from which it will be able to achieve mid-teen net IRRs, according to the New Mexico board meeting document. This return will have roughly 70 percent of the return from back-end value creation through operational efficiencies, capital expenditures and rent/occupancy growth, while the balance of the return would be coming from operating cash flow.
The overall investment strategy for the new commingled fund will be a combination of investments in property types that are showing continued secular growth and capitalizing on cyclical dislocation.
The targeted property types expected to benefit from secular growth are industrial, multifamily and certain office buildings in some innovation markets. The property types in the midst of disruption, but with attractive long-term fundamentals, are student and senior housing. Situational opportunities will include distressed hotels.
KKR will have the option of making public security acquisitions up to 15 percent of the total fund. These types of investments would include listed equity, preferred equity and related securities of real estate investment trusts and real estate operating companies.
The transactions for the fund are typically totaling at least $200 million of gross asset value. These will include a mixture of single assets and portfolios. Some investments will be add-on investments to existing KKR operating platforms in industrial and student housing and low to no development exposure.