A US investment house has become a “cornerstone” member of a recently formed real estate investment group created for family offices to use their joint financial firepower to source deals in the UK and continental Europe, this publication can exclusively report.

Capricorn Investment Group, based in Palo Alto, CA and New York, has signed up to the Family Office Real Estate Partnership, or FORE, initially committing €25 million (around $33.4 million) of funds.  

Today’s announcement of the investment came as founders of FORE laid out their business strategy to journalists.

“Capricorn’s involvement as a cornerstone investor is an important milestone for our new model, which offers sophisticated family offices the chance to invest in commercial property in a more transparent way and at a lower cost than traditional property funds,” said Basil Demeroutis, managing partner of FORE. “We are building a club of no more than 20 members and will acquire as much as €100 million worth of property per year in Europe and the UK, a significant amount in the current commercial real estate market environment.”

FORE aims at an internal rate of return, net of fees, of between 12 and 15 per cent, with leverage, he said.

“We’ve capacity for €150 million of investment capital over a one to two-year period,” he said, adding that FORE is relatively close to making its first property investment and talking to a number of family offices interested in joining.

“What we have tried to do is to make the 'club deal’ [in property investment] replicatable,” Demeroutis said.

Early days

FORE was launched in early March, creating a club in which family offices invest directly, and together, in commercial real estate. The organization claims that this approach is more transparent than a traditional fund model for holding property, and unlike a fund, it says, there is a full alignment of investor interests, no hidden fees, and a more flexible lifespan on investments. Also, the model is different from traditional investment “clubs”, FORE says, as deals can be hard to source and execute. In the case of a traditional club, once a potential deal has been identified, the arrangers must then try and assemble investors, whereas FORE has its investment firepower already in place.

There is a degree of investment discretion based on individual deals (one-third of capital is committed and two-thirds of it is discretionary); there is a short, two-year commitment period and the cost, so FORE says, is about half of the cost of traditional funds. (There is a 2 per cent management fee that declines over time, plus a performance fee component.)

As far as investment targets are concerned, FORE likes London and Germany as markets, particularly among undervalued properties in prime areas.

FORE aims to operate in deal sizes of between €10 million to €30 million, rather than the much bigger amounts favoured by institutions such as sovereign wealth funds, but which are larger than the sizes of private individual investors, Demeroutis said.

Asked if FORE is chasing after deals already attracting big investors and institutions, Demeroutis replied: “We are not hunting with the pack – we’re hunting with a rifle. When we look at transactions, we really don’t see competition….We are not seeing sovereign wealth funds [investing] in our sizes,” he said.

Club members commit at least €5 million with FORE over two years. The acquisition pipeline is shared in detail with members and investments are shared on a pro-rata basis with members, but each member can choose to take up to 50 per cent more or 50 per cent less than its share. Each asset acquired sits in its own special purpose vehicle, owned directly by the club member. Assets are subsequently sold but if still held by the seventh year, control passes to the club member.

Firepower

While some banks, under pressure from the financial crisis and tighter capital requirements, have pulled in their horns from commercial property, institutions such as family offices – around 6,000 of them globally on some estimates – have the money to plug a large part of any funding gap, Demeroutis said. In London alone, there are around 300 single family offices and around 100 multi-family offices, he said.

“It is a significant force to be reckoned with,” he said.

The platform takes a “fairly cautious” view on the outlook for European property, he added.