ING Realty eyes shift in strategy for funds

Real Estate Alert, June 23, 2004

ING Realty Partners, which has operated two high-yield funds targeting multiple property types, is leaning toward launching a new fund series targeted to specific niches.

If it proceeds with the idea, ING would start three separate funds that would invest in office, multi-family and single-family properties. The vehicles, each with up to $250 million of equity, would not be launched before the fourth quarter.

The company, a unit of ING Capital, has been overseen by Robert McSween, Bradley Muth and Andrew Sands since being formed in 1993. The investment team guided ING Capital away from investing its equity by itself and toward commingled funds.

The unit has launched two funds--the $541 million Realty Partners I in 1998 and the $225 million Realty Partners II in 2001. ING kicked in about a third of the equity for each vehicle, while the rest was raised from outside sources, including pension plans, insurers and foreign players. The first fund is more than 50% liquidated, but still has some $1 billion of properties in its portfolio. Realty Partners II is about 50% invested. When fully invested, the two funds are expected to have acquired more than $3 billion of U.S. and Canadian properties.

While it's possible that ING might proceed to raise up to $500 million for Realty Partners III, the management team is considered more likely instead to try the niche funds because of demand from investors for more-targeted investments. The office and single-family funds would likely shoot for an internal rate of return of more than 20%--similar to the goal for the Realty Partners series. The multi-family fund would target underperforming properties, including ones in need of renovation. It would likely target a return in the neighborhood of 18%.

However, there's a potential wrench in the works. ING Capital has not yet committed to staying in the high-yield fund sector. That has fueled talk that ING Realty's investment team has been approached by other equity players that might back their next venture. Nevertheless, those familiar with ING Capital's plans said the company will likely decide to proceed.

ING Realty recently lost two principals--James Maurer and Thomas Arnold. Maurer, a senior vice president and asset-management specialist, left two weeks ago to become chief operating officer of value-added player Morgan Properties of Hackensack, N.J. That followed managing director Thomas Arnold's decision earlier this year to depart for a similar position with Blackacre Capital of New York. Arnold had helped oversee acquisitions for ING Realty's funds

Morgan, an investment and development subsidiary of Paris-based C0finance Group, is looking to buy $100 million of retail and multi-family properties--essentially doubling its portfolio. Maurer will head the acquisitions effort, as well as develop joint ventures. Morgan, which buys along the East Coast, targets a stabilized yield of more than 15%.

Maurer joined ING Realty in 1997, following a 17-year career that included a stint with Mutual Life of New York.

Arnold, who joined ING Realty in 1999 from Credit Suisse First Boston spinoff Praedium Funds, is handling acquisitions and dispositions for Blackacre, an active investor both in the U.S. and Europe. Blackacre, in partnership with Cerberus Institutional Partners and Whitehall Street Real Estate Funds, last week agreed to buy a $2.3 billion portfolio of German residential properties from a government entity called the Federal State of Berlin--a deal Arnold helped coordinate.

ING Realty has not replaced either principal, although it did add Matt Blauvelt and Javier Bustillo, to its Chicago acquisitions team. Both are vice presidents.