Goldman Closes Second Real Estate Credit Fund at $4.2 Billion

May 07, 2014 12:01 am ET

May 7 (Bloomberg) -- Goldman Sachs Group Inc., which shifted its real estate focus to lending from buying properties after the financial crisis, completed fundraising for its second real estate credit pool at $4.2 billion.

The New York-based firm raised $1.8 billion in equity pledges from institutions and wealthy individuals, supplemented by the same amount in borrowings and $600 million of the firm’s own money, said Alan Kava, co-head of the real estate investing group in Goldman’s merchant banking division. About 60 percent of the capital pledged came from U.S. investors and most of the rest was from Europe, with a small amount from Asian investors.

Goldman is competing with other private debt funds, mortgage-oriented real estate investment trusts and banks in offering ways to earn higher yields at a time of low interest rates. The new vehicle will invest in Europe and the U.S., expanding on Goldman’s first real estate credit fund, which made about $3.5 billion of loans, according to a marketing document.

“We will be opportunistic in terms of where we see value,” Kava said in a telephone interview. “The first fund was U.S. only. We’re hopeful we will end up with about 50-50” between the U.S. and Europe.

The new Broad Street Real Estate Credit Partners II plans to make senior loans and mezzanine loans backed by high-quality commercial real estate, to fund acquisitions, refinancings and recapitalizations, according to the document. It intends to generate returns in the “mid-teens” by charging interest rates of 7 percent to 10 percent and leveraging the equity.

Current Yield

The new fund will make and hold the loans, distributing the interest income it receives to investors quarterly, said Peter Weidman, the managing director who oversees the new fund.

“What our investors like about this is it’s a current yield so we’re not just making one-time distributions by securitizing,” Weidman said in a phone interview.

The new fund has invested about $500 million already, in five deals, according to the marketing document. They include a mezzanine loan to help finance the purchase of a group of Southern California office buildings, and a senior loan, or first mortgage, on a New York City rental apartment building that’s being converted to for-sale condominiums. Higher-yielding mezzanine loans are used to fill the gap between first mortgages and equity.

Goldman’s first real estate credit fund, known as Real Estate Mezzanine Partners, made 28 investments, about two-thirds of which were senior mortgages and one-third mezzanine loans, according to the marketing document.

“We have a competitive advantage by focusing on larger deals and being able to provide the entire loan to our borrowers,” Weidman said. “We see less competition in the larger loan space.”

The new fund has an investment period of three years, with possible extensions, according to the marketing document.