Lazard Freres & Co. is about to launch a $2 billion real estate vehicle in what would become the biggest-ever dedicated buyout fund for the industry.
Dubbed Prometheus Realty Investors III, after the statue in Rockefeller Plaza where Lazard is headquartered, the new fund is the third of its kind for Lazard Freres Real Estate Investors LLC, an affiliate of the investment bank.
The firm’s two previous equity funds-at $800 million and $1.5 billion-invested exclusively in real estate operating companies. “We’re often considered the [Kohlberg Kravis Roberts & Co.] of the real estate business,” explained a senior Lazard executive familiar with the effort. “The only difference is we play in a different sandbox.”
Unlike many real estate funds that scour for distressed single properties, mortgage portfolios or raw land, Lazard’s have looked to take sponsor ownership positions in real estate operating companies. Over the last few years, the investment operation has committed $2.3 billion to 15 separate public and private companies.
That was not the case prior to 1993, however. That year Lazard-fortified by years of experience advising private real estate operating companies-made the switch to the strategy it has followed ever since.
Lazard’s experience with real estate operating companies dates as far back as the 1970s. The firm helped create Corporate Property Investors, the first private paired-share real estate investment trust. That experience-coupled with the personal know-how of Lazard principals who had run their own real estate operating companies and its clients’ receptivity to rolling up assets into corporate form-has translated into a long-term business for Lazard as a real estate investment fund.
The firm dove headfirst into a real estate principal role in 1990, through the launch of two mezzanine debt funds for high-quality, single properties or asset portfolios.
The following year it started kicking the tires on buyout funds and in 1993 launched its first.
Creating a real estate fund played to the firm’s existing strengths-both from an industry and a corporate finance perspective. “The fund really gave us a chance to build on what we thought was a competitive advantage, and to bring an approach to real estate that we thought the industry needed,” the Lazard executive said.
Lazard’s effort pursues investment opportunities through three core strategies: purchasing corporate divestitures, such as the spin-off of Bell Atlantic’s properties after the merger with NYNEX; investing in public turnaround situations, such as a Raleigh, N.C.-based retail shopping center company now called Konover Property Trust; and teaming up with a strong entrepreneurial partner, such as American Apartment Communities out of San Francisco.
The real estate investment operation has $8.5 billion in assets under management and has generated returns of more than 30% since the early ’90s. Its investors include major domestic state pension funds, as well as some blue-chip corporate funds, and several offshore institutional investors.
Using Real Estate as Overseas Foothold
The new fund also marks the latest strategic step for the Lazard affiliate: going international. This time around, the fund will invest largely in Western Europe and secondarily in Asia. Prometheus Realty Investors III will actually comprise two side-by-side funds, but will not commingle results.
Lazard already has some experience plowing money overseas. In September, it teamed up with Destination Resorts Co. and billionaire Bill Gates to buy the London-based Cliveden luxury hotel chain and take it private. Lazard plans to use the Cliveden franchise as its platform company to buy and build other hotels in all major European cities from Paris to Amsterdam.
As for Asia, Lazard intends to bank on some longstanding relationships with some of the region’s biggest real estate investors. The Government of Singapore Investment Corp., an arm of the Singapore government, for example, is already an investor in the firm’s second fund and has encouraged the firm to seek opportunities throughout Asia.
Although Lazard’s principal efforts reap some benefits from its banking affiliate company, the two groups try to operate at arm’s length by maintaining two entirely separate staffs and, with certain types of transactions, even bringing in outside investment bankers. Case in point: Lazard has tapped Merrill Lynch & Co. to advise on an as-yet-unannounced strategic merger of its mezzanine debt business with another party.