N.Y. Real Estate Firm Launches Effort to Tap Wealthy Investors

(%%Commercial Real Estate Direct)

November 17, 2004 - The Prescott Group, a New York real estate merchant bank, has lined up an equity investment from the family of Gordon P. Getty, allowing it to embark on an effort to launch a series of real estate limited partnerships specifically for high net worth individuals and families.

Prescott was founded in 1987 by Theodore R. Gamble Jr., a former principal of Morgan Stanley, and Susan L. Stupin, who was previously with Goldman Sachs' real estate investment banking unit. Prescott's principals have been involved as either principals or advisors in some $10 billion of real estate transactions.

The Getty investment, the size of which was not disclosed, prompted the company to effectively form two units: Prescott Capital Advisors, which provides investment banking services to clients, and Prescott Capital Management, which will develop a series of investment vehicles for the high net worth investor community. Prescott will also advise investor clients on a separate-account basis.

The company expects that it will acquire more than $400 million of investments next year and already has several potential portfolio acquisitions in its pipeline. Those investments will be capitalized through limited partnerships formed with high net worth investors and leveraged by up to 70 percent.

The high net worth community is increasingly viewed as one of the last untapped capital sources. Such investors, generally categorized as having at least $20 million of assets, are active players in the private equity or hedge-fund markets, but most real estate sponsors haven't yet tapped them in an organized fashion. High net worth investors make up a significant ownership class, holding partnership stakes in thousands of properties through syndications.

Prescott hopes to tap that deep - and growing - capital base by offering institutional-quality investment-management services. Other sponsors, recoqnizinq the deep and qrowinq base of capital in the hiqh net worth community. are fashioninq similar efforts.

Prescott's efforts put them on the cutting edge of the next stage of capital-raising in the real estate investment market.

"We see an opportunity and need in the high net worth marketplace for first quality investment products with institutional fee loads and institutional assets and operating partners," explained Stupin.

The first commingled real estate funds in the current cycle got off the ground in the early 1990s by sponsors such as Starwood Capital Group, Goldman Sachs and Morgan Stanley. While some had the participation of wealthy individuals and families, institutional investors with strict reporting requirements provided the bulk of their capital. To make their vehicles more amenable to investors, sponsors generally invested their own capital. They also developed manageable fee structures and a profit-sharing scheme that rewarded outside investors before sponsors.

Prescott is taking essentially the same approach.

It hopes to form joint ventures with existing operators that already own properties and would like to recapitalize them. For instance, Prescott could team up with a shopping center operator on a portfolio of 10 properties across the country. The operator would retain an interest and continue managing and leasing the properties. Prescott, which would serve as general partner, would then sell equity interests in the form of limited partnership stakes through the wealth management community. Minimum investments will be roughly $250,000.

Such an approach allows Prescott to offer investors a stake in a portfolio of properties diversified by geography, lease terms and tenants. Its partnerships, each of which would own a portfolio of similar-type properties, would have a value-added focus and lives of up to seven years. The partnerships could serve as an exit strategy for investments that opportunity funds made and improved to a certain degree.

"There's a mandate for portfolio diversification in the high net worth market," Stupin said. "We're trying to provide a product of the level of quality and professionalism that you can find in other asset classes, but doesn't exist in real estate."

Prescott's offerings will be structured so that it won't receive any promoted return until its investors get back all their investment capital, plus their expected initial return. When that happens, excess returns are shared. Prescott will also receive an upfront fee for acquisitions plus a fee for ongoing asset management - an approach popularized in the alternative investment universe.