04/29/2009

Lowe Shelves 2 Funds, Delays Close of Third

Lowe Enterprises Investment is the latest big-name fund operator to be sidelined by the hostile climate for soliciting equity.

The Los Angeles shop recently shelved two property funds after trying to raise capital for a year. Lowe had hoped to line up $300 million apiece for Lowe Real Estate Income and Growth Partners 2 and Lowe Hospitality Investment Partners 2. The plan was to have first equity closes for each vehicle this spring, with at least $100 million. But because investors pulled back after suffering big losses in their investment portfolios, Lowe was unable to convert preliminary interest into firm commitments.

Meanwhile, market players predict Lowe won't be able to close a high-yield-debt vehicle on schedule. Lowe lined up $80 million last May for the first equity close of the club fund, called Lowe Structured Investment Fund. It hoped to raise another $70 million by next month. Lowe is now expected to ask lead investor Wisconsin Investment for permission to extend its marketing deadline.

More than 100 real estate funds have been canceled, put on hold or downsized since the credit crisis began. Although initially striking lesser-known players, the commitment freeze has spread to established names, including CB Richard Ellis Investors, Credit Suisse, Morgan Stanley and Stockbridge Capital Partners.

Lowe last week informed prospective investors in the two property funds that marketing efforts have been shelved, at least until later this year. Outsiders are skeptical that the efforts can be resumed before early next year.

Income and Growth Partners 2 would have targeted a 12-16% return through investments in overleveraged and underperforming commercial properties, as well as properties with distressed owners. It would have concentrated on key markets around the country, including Denver, Los Angeles, San Francisco, Seattle and Washington, D.C. Senior vice president Steve Nesterak was slated to oversee acquisitions.

Hospitality Investment Partners 2 would have aimed for a 15-18% return by acquiring hotels in North America that are underperforming, suitable for renovation or repositioning, or controlled by distressed owners. Acquisitions were to be headed by senior vice president Mike Everett.

Nesterak and Everett are now expected to focus on Lowe's existing portfolio, as well as on acquisitions made on behalf of separate-account clients or with joint-venture partners.

Lowe has told prospective investors it thinks it can land additional investors for the debt fund with 6-12 months of additional marketing. The unleveraged vehicle seeks a 14% return, primarily through the origination of mezzanine loans and B-notes, as well as investments in preferred equity. Executive vice president Phil Peters heads the fund. Investors said it had spent about $15 million of equity as of the end of the first quarter.

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