By Jon Peterson
The San Francisco Employees’ Retirement System has approved a commitment of up to $50 million into the Gaw Capital U.S. Value Add Fund.
This commingled fund will have San Francisco as one of its targeted markets. The pension fund stated in a board meeting document that the investment fund will be buying assets in the emerging areas of gateway cities in the United States. Examples of emerging sub-markets include the South of Market area of San Francisco.
The other examples mentioned included the Hollywood and downtown areas of Los Angeles, the Fulton Street area of Chicago and the Chelsea area of New York City.
It will be investing in some select secondary markets as well. These would include Austin, Chicago, Denver, Nashville, Portland, Raleigh-Durham and Seattle.
The U.S. Value Add Fund is sponsored by Los Angeles-based Gaw Capital U.S., a dedicated institutional investment manager placing capital in the United States. It was created by Hong Kong-based Gaw Capital Partners.
Prior to this investment fund, Gaw Capital had been investing in the United States through its subsidiary company, Los Angeles-based Downtown Properties. This company had invested approximately $236 million of equity across 35 value-add and opportunistic deals. The assets are currently projected to deliver a 32 percent gross IRR and a 3X gross multiple.
Downtown Properties has been investing in the San Francisco market already. In September of last year, it paid $11.5 million to acquire the 41,039 square foot 1098 Harrison Street office building.
Gaw Capital is seeking a $300 million to $500 million capital raise for the U.S. Value-Add fund. The fund manager will be investing 3 percent of the total fund commitments with a cap of $10 million as a co-investment into the commingled fund.
The targeted returns for the fund are a 16 percent to 18 percent gross IRR, a 13 percent to 15 percent net IRR and a 2X equity multiple.
The investment strategy is mainly to buy creative office buildings and hotels across major knowledge/innovation markets. Apartments and retail will also be considered. The fund will pursue value-added strategy seeking to redesign, redevelop and/or reposition mismanaged, undercapitalized and undervalued assets.
The Value-Add fund will target a portfolio of 15 to 20 investments generally requiring $5 million to $25 million of equity. It could consider some larger deals. Deal sizes in this range have typically been overlooked by most private real estate funds and REITs.
The commingled fund will be investing $40 million into a joint venture that is dedicated to the acquisition and redevelopment of hotels focused on supply-constrained markets near major universities across the country. The total equity in the venture is $200 million. The balance of the equity is being funded by a $150 million commitment from a large institutional investor in the United States and $10 million from Downtown Properties and its affiliates.
San Francisco Employees approved the commitment into the Gaw Capital fund at its May 14th board meeting. At the same meeting, the pension fund also verified an item to pursue in the future the purchase of an office building in San Francisco for its permanent headquarters.
The pension fund recently entered into a 10-year lease for office space at 1145 Market Street to serve as its new headquarters. Its investment staff is planning to relocate to this new location by September. Under terms of the new lease, the pension fund has an early termination option after July 1, 2017, with a 365-day advance notice to the landlord.
The investment staff for San Francisco Employees did a survey and found that the majority of California public pension plans own the building that houses their headquarters. Many of these plans hold the headquarters building as part of their real estate investment portfolio.