Some investments seem to dance on the line between venture and buyouts. Warburg Pincus’s latest deal, a $50 million commitment to launch Wall Homes, is one such transaction. The firm is repeating a past strategy in the homebuilder space, and this time around Warburg will invest $50 million of seed money to Choice Homes veteran Steve Wall, with the capital going toward building the infrastructure of the business and making acquisitions to extend the franchise.
The investment closely resembles what the firm did with M.J. Brock, which was sold to Ryland Homes in 1986, and Pacific Greystone, which was snapped up by Lennar Corp. in 1997.
The blend between venture and buyouts is nothing new for the firm. “We started out mostly in the venture business, but now we’re typically characterized as a buyout fund, but there’s still a very active venture culture throughout the firm,” Warburg Pincus Managing Director Reuben Leibowitz tells Buyouts. “We’re just focused on doing the best type of deal and chasing the best opportunity. This transaction does cross the line. Initially it looks like a startup, but as we get further down the road it will gravitate toward more of a buyout strategy.”
A Bubble Buy?
Warburg clearly understands that it’s not buying into real estate at a dip. The Fed has started to slowly ramp up interest rates, and while new home sales continue to show strength, (showing a 5.2% bump year over year in February), most economists predict a slowdown could be ahead.
But this bearishness was factored into Warburg Pincus’s plan. “You read in the general press that we’re in a bubble, prices are going to collapse and interest rates are going higher, et cetera… We realize this is a cyclical business with ups and downs, but if you have the right strategy, you should be able to do well in this business over time,” Leibowitz said.
Warburg’s strategy with Wall Homes will be to focus initially on the Dallas and Fort Worth markets and build out from there. The region, he says, is key. “Texas has not had that much appreciation in the housing market. It’s been in the single digits, growing only about 3% for the past few years,” Leibowitz said. Additionally, he added that Wall will target the first-time homebuyer market, with single-family houses starting in the range of $130,000 to $150,000. That helps Warburg Pincus and Wall avoid the temperamental luxury home space, which would be the first hit in a housing crunch.
Regarding interest rate increases, Leibowitz is not at all blanched by the prospect of rising rates. “This is something that we’ve considered very carefully, and generally found that interest rates only matter [in real estate] when they get really high, into the double digits. They would have to go a lot higher to have any great impact on [Wall],” he said.
The firm used its Warburg Pincus Private Equity VIII, LP fund. The firm is currently raising Fund IX, which is said to have a target in the $8 billion ballpark, although Leibowitz would not comment on the fundraising.