10/07/2009

Townsend Clients Join Huge Brookfield Fund

Townsend Group, the big real estate consultant, has lined up $500 million of commitments from its long roster of clients for a $5 billion club fund sponsored by Brookfield Asset Management.

The Townsend pool is the only block of U.S. money in the fund, which Brookfield is expected to close within a few weeks. Toronto-based Brookfield is kicking in $1 billion itself. Two sovereign wealth funds, China Investment Corp. and Future Fund Australia, are also supplying $1 billion each. And three players are each contributing $500 million: Canadian Pension Plan, Public Sector Pension of Canada and Government of Singapore.

Brookfield set a $500 million minimum for participants - a level too large for nearly all U.S. institutional investors since the market turned down. So Townsend pooled money from about a dozen unidentified clients to reach the threshold. The Cleveland firm serves as consultant to roughly 85 pension funds, endowments, foundations, foreign investors and funds of funds. Those clients have real estate allocations in excess of $130 billion.

The Brookfield fund, called Global Real Estate Investor Consortium, will seek a 25%-plus return by making huge investments - each involving at least $500 million of equity - in distressed debt and properties globally. It can recapitalize or reposition properties, as well as restructure debt or companies. Most of its deals, at least initially, are expected to involve debt restructuring.

The vehicle's terms permit any of the seven limited partners, including the Townsend investors, to opt out of specific investments. But the investors can also co-invest alongside the vehicle. That's a key for Townsend's clients, which may have chipped in only $25 million or $50 million apiece, but will have the ability to see all of Brookfield's deals and potentially plow in additional equity.

While most funds charge a 1.5% annual management fee, Brookfield will only employ a 1.25% fee on each acquisition. That structure, which will result in much lower fees than normal, no doubt helped Brookfield attract such large equity allocations.

Brookfield is also charging a standard incentive fee. After investors receive a 12% preferred return, the sponsor is entitled to half of the profits until it amasses 20% of cumulative distributions. After that, it gets 20% of any additional profits.

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