RBC enters private real estate with $800m fund – Exclusive

RBC Global Asset Management has taken a first step into the private market with the launch of an open-ended core real estate fund, which will target an initial fundraise of $600 million-$800 million.

The RBC Canadian Core Real Estate Fund is the first product launched by the firm’s new direct real estate equity program, which was established in August 2018 with the hiring of Michael Kitt, formerly chief financial officer at Oxford Properties, the real estate arm of Ontario Municipal Employees Retirement System. Kitt joined RBC GAM as head of real estate equity investments and was tasked with building out the firm’s direct real estate equity investment business.

Previously, RBC GAM’s involvement in real estate extended only to its mortgage business. The launch of the fund and RBC GAM’s decision to enter the world of private asset investments was a response to its client base, which has been showing more interest in the private market, Kitt said.

The RBC Canadian Core Real Estate Fund was established by RBC GAM as part of a collaboration with British Columbia Investment Management Corporation, which invests on behalf of the pension plans in the Canadian province, and BCI subsidiary QuadReal. The new vehicle will invest in core office, retail, industrial and multifamily property within Canada, according to Kitt. By targeting an average asset value of more than $150 million, he believes RBC GAM will offer both large and small institutional investors exposure to a high-quality diversified portfolio.

“Quite often you see large [pension] funds come together and create co-ownerships because these assets are so big,” Kitt told PERE. “What we’ve done is created a way for smaller [pension] funds to play in that co-ownership and use that co-ownership strategy.”

RBC GAM has arranged for BCI to sell a 50 percent stake in an existing $7 billion portfolio to seed the fund over the course of the next three years, which provides investors with a clear growth path for the open-ended fund, he said. BCI will continue to hold a 50 percent stake in every asset in the portfolio alongside the fund, which ensures alignment between the investors and the venture.

QuadReal will work alongside RBC GAM to provide research and asset management support. The BCI subsidiary will also be responsible for 100 percent of the leasing and property management of the co-owned assets. The RBC GAM fund and BCI will split the cost of the property management fee.

The predetermined three-year schedule gives BCI time to reinvest the capital, RBC time to raise more capital for the fund and gives investors time to average in assets throughout the cycle, Kitt said.

The fund’s performance targets will be based off the two MSCI indexes in Canada: the MSCI REALPAC Canadian Property Index and the MSCI REALPAC Canadian Fund Index.

The structure of the new fund and venture could present challenges to RBC, however, according to industry observers.

Evan Hudson, a partner at law firm Stroock & Stroock & Lavan, recommended the bank provide as much transparency as possible around the portfolio purchase from BCI to clear up any potential conflicts of interest.

Doug Weill, a founder and co-managing partner at advisory firm Hodes Weill & Associates, agreed. One key question investors will ask is what BCI’s intentions are for selling the $7 billion portfolio, he said. They will want to see a third-party evaluator to ensure that the assets are being contributed at fair market valuations, as well as understand who will sit on the fund’s investment committee. Weill also anticipates the market will ask why BCI and QuadReal would want to direct transaction opportunities to the RBC GAM fund when the two are both active in the Canadian market with significant portfolio holdings. The co-ownership structure at the asset level may also raise questions about how quickly the fund can provide liquidity when needed, he added.

Despite these challenges, RBC has the unique advantage of a longstanding pedigree and direct line to investors through its platform, which will help the bank in fundraising, Hudson said.

Currently, the RBC GAM platform manages assets in excess of C$425 billion ($317.45 billion; €270.83 billion) and supports both institutional and retail investors.