03/11/2009

With Few Backers, CB Shelves Europe Fund

CB Richard Ellis Investors has suspended the marketing campaign for its latest European fund after failing to attract enough capital for a first equity close.

The move comes as the sharp downturn in the European property market has caused investors to pull back from new fund commitments. CB's marketing effort was hurt by the poor performance of two predecessor European vehicles, as well as several shifts in the new fund's investment strategy. More than 60 U.S. and European funds have been canceled or postponed amid widespread economic turmoil.

As CB re-evaluates its approach to Europe, the Los Angeles shop's fund-raising efforts will now focus on two planned open-end funds that would target high-yield debt investments in the U.S.

CB spent nine months trying to raise €1.5 billion ($1.9 billion) of equity for the suspended value-added fund, which would have targeted underperforming properties, developments, redevelopments and preferred-equity investments in Germany, the U.K. and oher Western European countries. The marketing campaign for the vehicle, CB Richard Ellis Strategic Partners Europe Fund 4, was recently suspended after CB failed to raise enough capital for a first equity close. CB hasn't decided whether to revamp the offering. If it does, the marketing campaign isn't likely to resume before next year.

Some potential backers shied away partly because they were frustrated with CB for changing its mind several times before finally deciding that the fund would include U.K. investments in its portfolio. Original plans called for raising a separate U.K. fund. Then CB talked of making it a sub-fund so investors in Europe Fund 4 could choose exposure to just the U.K., other parts of Europe or both. CB later decided the fund should avoid the declining U.K. market altogether, costing it a $40 million commitment from Chicago Public School Teachers. By late last year, the fund operator reversed itself again.

More recently, prospective investors were dismayed by dismal third-quarter performance figures for two CB funds targeting Europe, both of which closed in 2007 and are fully invested. Its Strategic Partners Europe Fund 3, a €600 million vehicle that focuses on Western Europe outside the U.K., was down by 33.3% in the third quarter. Even worse was the £440 million ($622 million) Strategic Partners UK Fund 3, which was off 63.4% for the quarter.

Like most of its peers, CB's UK Fund 3 has been pummeled by declining property values due to credit-crunch fallout. That vehicle was down 93.1% from inception through the end of the third quarter.

Although Europe Fund 3 was reported to be up 36.1% since inception, investors dismissed that figure because the fund relied heavily on subscription lines to finance its activities, drawing down only about 10% of pledged equity. The vehicle was off 32% for the 12 months ended Sept. 30 - a more-meaningful measure of performance in the eyes of investors.

CB's suspended offering would have combined strategies from both of those funds. The sidelined successor fund, with a 14-16% return goal, would have invested about 40% of its equity in Germany. The rest would have been spent on properties in France, Italy, the Netherlands and the U.K. It would have focused on investments tied to office properties, with residential and retail plays each encompassing about 20% of investments.

Executive managing director Thibault de Valence co-founded CB's European operation in 2000. Based in Paris, he has headed the firm's European fund series since it was started in 2003. Managing director Giles King in London oversees U.K. investments.

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