Harsh Reality Sets In for Some Fund Shops

Fund operators are increasingly looking at this year as a wipeout for raising equity.

In the past few weeks, at least five sponsors decided to halt marketing campaigns after lining up less equity than originally targeted. The moves came after the sponsors spent months unsuccessfully trying to coax investors to convert soft commitments to firm pledges.

The operators that fell shy of their equity goals include Capri Capital, John Buck Co. and Square Mile Capital. And they may be just the tip of the iceberg. Fund pros think that as many as 100 of the roughly 240 vehicles now being marketed will struggle to raise any money this year. That would lead even more operators to cancel, postpone or downsize vehicles.

The equity-raising world has essentially had two shifts since September, when the collapse of Lehman Brothers roiled financial markets. Initially, dozens of operators canceled, delayed or shrank vehicles. At that point, the consensus was that conditions would improve by early this year.

But in the past few weeks, a second shift has occurred. Fund operators are now admitting it's close to impossible to get investors to commit capital, using words like "brutal" and "bloodbath" to describe the atmosphere. While sponsors recognized that beaten-down investors wouldn't have the wherewithal to re-enter the market, some now admit they underestimated how reluctant even well-capitalized investors would be to get back in the game. Those investors remain scared of getting burned in a real estate market that may not yet have bottomed out.

To get investors off the fence, some operators have resorted to promising not to draw down commitments until next year. Some are also cutting or waiving fees tied to committed but uninvested capital. Others are hoping that economic conditions will improve enough to give investors more confidence. But for now, the outlook for raising capital is bleak.

Fund operators that have stopped marketing campaigns include:

*Square Mile Capital, which was seeking to raise $850 million for its latest high-yield-debt vehicle, Square Mile Partners 3. The New York firm had $806 million lined up in December, when there was talk of reaching its $1.2 billion ceiling within three months. But Square Mile was unable to convert additional soft commitments and wrapped up the vehicle two months ago at $806 million.

*Capri Capital, which was seeking to raise $1.2 billion for its Capri Urban Investors Fund. The Chicago firm had $538 million of commitments in March 2008. Last September, it received a 6-month extension to finalize some $160 million of soft commitments, but couldn't do so. The vehicle's closing took place at the end of March with $538 million.

*AvalonBay Communities, which completed its second multi-family fund in March with $400 million of equity. The Alexandria, Va., REIT originally sought to line up $500 million and appeared well on its way to that goal after getting $333 million of commitments for a first close in September, but interest subsequently dropped off.

*TriGate Capital, which was seeking to raise $350 million for TriGate Property Partners. The Dallas shop lined up $110 million in 2007 from California State Teachers. TriGate retained Morgan Stanley last summer to raise additional capital, but market players say the two agreed a few weeks ago that the market was dead. TriGate abandoned the fund and instead formed a $115.5 million joint venture with CalSTRS.

*John Buck Co., which was seeking to raise $150 million for JBC Debt Fund 1. The Chicago shop held its first and only close last August, with $65 million of equity. It has decided not to continue actively marketing the vehicle, which will hold its formal close this August.

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