Carmel closes seventh multifamily fund on $1.28bn – Exclusive

Surpassing its $1bn target, Investment Fund VII will focus on ground-up development in major US markets.

Carmel Partners has closed fundraising for its seventh US multifamily investment fund on $1.28 billion of equity, PERE understands.

The San Francisco-based investment manager surpassed its $1 billion target for Investment Fund VII and hit its hard-cap of $1.25 billion, Ron Zeff, the group’s founder and CEO, told PERE. The multifamily specialist contributed $30 million of its own capital to the vehicle.

A strong contingent of re-ups led the charge for Carmel’s latest capital raise, which reached its first close in August 2018. Zeff said 95 percent of the investors from Investment Fund VI returned for the seventh installation, accounting for $950 million.

Most repeat investors were US endowments and foundations, PERE understands, along with some public and corporate pensions. Carmel also stepped up its outreach to foreign investors, Zeff said, resulting in more than 10 percent of commitments coming from Europe and Asia.

Since it launched the Investment Fund series in 2005, Carmel has raised more than $5.5 billion and is renovating or developing more than 41,000 units – a portfolio valued at more than $12 billion.

Carmel declined to share specific return targets for the fund or discuss the performances of its previous vehicles but Zeff said the oversubscription on Fund VII speaks to investor confidence in the firm’s track record.

“We are US multifamily experts and our investors entrust us with a broad mandate in terms of what we can invest in through our funds,” he said. “We focus on the supply-constrained markets that we think will perform the best over the longer term, and then have the ability to invest in ground-up development, value-add acquisitions and multifamily debt.”

While previous vehicles have targeted value-add opportunities, Investment Fund VII will focus on ground-up development projects, primarily in the San Francisco Bay Area, Southern California, New York, Seattle, Denver, Washington, DC and Honolulu.

Though the fund is open to investing elsewhere, Zeff said Carmel prefers familiar markets where the firm has boots on the ground. The vehicle’s targeted markets have also proven to be less vulnerable to recessionary downturns, which is a key component of the company’s strategy.

“The way Carmel invests is that we assume we will go through a recession during the hold period of each individual asset, and that our funds will likely go through a recession during their life,” Zeff said.

Multifamily was the prolific property type among sector-specific funds last year with 30 vehicles raising a total of $10.6 billion, according to PERE data. Of that, $5.6 billion is dedicated to value-add investments in North America.

“We’re finding that right now there’s so much capital flowing into the value-add space that those margins are squeezed down and are very, very small, if any,” Zeff said. “On the development side, we’re able to find better opportunities, that meet our required margin of safety, primarily because of Carmel’s vertical integration. We believe it is harder to achieve these margins if you’re using merchant builders or outsourcing to third parties, which typically means sharing the upside and taking on JV partner risk.”