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McConnell sizing up projects for wholesale property investment fund

Published 13 September 2010

The McConnell Group has launched a wholesale fund, the McConnell Real Estate Opportunity Fund LP, to invest in projects in the $10-20 million range. It opened to habitual investors in August and closes on Friday 8 October.

McConnell Group director John McConnell and McConnell Funds Management Ltd general manager Greg Whitten said in an interview last week they were aiming for $30-60 million equity and intended to invest in 4-6 projects for 6 years.

Success with this fund would be followed by more closed-end funds using the same model.

Mr McConnell said the family company had always thought the capital structure of development in New Zealand was wrong, requiring investors to roll over debt with finance companies. Under the proposed limited partnership, the fund would have about 50% bank debt with equity from investors injecting a minimum $100,000 each. The McConnell Group intended to invest about 10% of equity.

He said it was not a vulture fund, which was based on earning from an improvement in the market, but was an added-value fund. It was also not about cashflow, which the typical fund depended on to encourage retail investors in.

Mr Whitten said McConnell saw opportunities in some stalled projects, which were either started or consented, but couldn’t get the bank funding to complete.

“We’d probably see projects in the $10-20 million range, the sort of thing an individual couldn’t get into in their own right. We’re talking to a range of potential investors and targeting investor returns of 15-20% after fees. Private developers would have been targeting higher levels than that, probably 40%, but with higher debt.

“As an added-value fund, when we buy we will think about how it’s sold. We’re not looking for an improvement in the market. We want to be careful about taking on assets because we have to sell them, but there seems to be a reasonable level of liquidity below $20 million. We would take on assets with a maximum end value of $20 million, but our preference is for something we can split up, for example a mixed-use project.

“The investors get all the return up to 12%, and above that they get 70% and the fund manager 30%.”

The fund is – not surprisingly – likely to be involved in transactions that involve a related-party aspect, property that comes through the McConnell Property pipeline and possibly involving Hawkins Construction, and has given sign-off on related-party transactions to an external advisory committee elected by investors in the fund.

Mr Whitten said the limited partnership model also provided more transparency. Each project will be done in a sub-limited partnership and any borrowing will be done at individual project level. The lender will have no recourse to the other projects.

The performance fee is calculated an internal rate of return on the whole fund, net of fees – the European model. “Our fees are based on the investor’s equity, not on the total value of the assets. At 50% equity, our 1.5% fee will equal 0.75% in other funds. We’re effectively the opposite of fund managers who are raising the asset level to get more fees.

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Attribution: Company release, interview, story written by Bob Dey for the Bob Dey Property Report.

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