RREEF Recapitalizes $1.6 Billion Global Fund

The limited partners of a cash-starved $1.6 billion fund that RREEF launched more than four years ago have pumped in $100 million of additional capital to support the existing investments.

The infusion is one of the largest fund recapitalizations prompted by the market downturn. About a half-dozen fund shops have raised additional capital to bolster vehicles. Another 30 operators are soliciting extra money.

In most cases, the vehicles are fully invested but unexpectedly need more cash. For example, a partner in an investment might be unable to follow through on an equity commitment for a planned development or redevelopment. Or falling property values may have made it impossible to fully refinance maturing debt. Or repositioning might be needed following the departure of key tenants.

Perhaps one-third of the roughly three dozen limited partners supplied additional capital to the opportunity fund, RREEF Real Estate Global Opportunities Fund 2, which is backed mostly by U.S. pension funds. Fund employees and RREEF's parent, Deutsche Bank, were among the limited partners participating in the recapitalization, which closed two weeks ago.

The infusion was structured as a senior unsecured debt facility with a two-year term and a one-year extension option. Market players said the money will be used to restructure or retire debt, to deleverage properties prior to refinancing or to improve properties.

Through the end of last year, the vehicle posted a 23.8% annualized loss, according to investors. That performance is in the middle of the pack for vehicles of that vintage.

The fresh capital "gives them a path to a positive return for the fund," said one market player familiar with the deal. "They needed some capital to complete restructurings and continue on with their business plans."

While infusions sometimes take the form of preferred equity, the investors supplying fresh capital structured the new capital as debt to establish a fixed timeframe for the investments - with a maturity of no later than 2013. Had the capital been structured as preferred equity, limited partners wouldn't be paid off until all of the fund's assets are liquidated. That is scheduled to occur in 2015.

RREEF raised the equity in-house in a transaction completed about two weeks ago. Hodes Weill & Associates, a New York advisory firm, is advising the limited partners and serving as administrative agent for the facility.

The fund's limited partners include Arizona State Retirement, Calpers, California State Teachers, Chicago Public School Teachers, Colorado Public Employees, Illinois State Board, New Jersey State Investment and North Carolina Public Employees. There are also multiple foreign investors. Deutsche kicked in about $85 million of the fund's equity, and fund employees contributed some $15 million more.

The fund, which began investing in December 2005, seeks an 18% return by acquiring various types of properties in the U.S., Europe and Asia. Because of the fund's timing, a good chunk of the purchases were made at or near the market's peak. For example, it bought eight Maryland and Virginia apartment properties in December 2006 at an aggressive capitalization rate of less than 5%, paying $540.9 million to seller Bainbridge Cos. of West Palm Beach, Fla., which retained a small stake.

The fund is headed by Christopher Papachristophorou, chief executive of RREEF's global opportunistic investments group. He took over the fund in June 2007.

RREEF put plans to raise $1.5 billion for a successor fund on hold last year, turning its attention to recapitalizing Fund 2. With the recapitalization out of the way, there are rumblings that RREEF may revive equity-raising efforts for Fund 3 within a few months.

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