By Tom Stabile
Brookfield Asset Management raised a quick $1 billion last quarter in a new wide-angle special opportunities fund – aiming for a less travelled product area in which Blackstone Group and others
have raised big sums and face little competition.
Brookfield is aiming for $5 billion overall in the new strategy, part of a suite of products the $385 billion manager has been launching in the last two years to complement its flagship real estate, infrastructure, and private equity funds. The manager is finishing a fundraising cycle for the latest vintage in each of those asset classes, with $27 billion raised over the past year toward an infrastructure fund targeting $20 billion, a private equity vehicle that has brought in $8 billion, and a real estate fund that closed in January with $15 billion.
Brookfield raised $19 billion overall last quarter, led by $10.2 billion for the infrastructure fund and $500 million for its private equity fund. But that quarterly fundraising haul also featured newer vehicles, including $1 billion for the new special opportunities fund, $700 million for a long-life infrastructure strategy, and $500 million for its new opportunity zone fund, which it landed on several advisor platforms this year.
The new special opportunities fund has the most sweeping mandate of the newer products, able to invest through either control or minority stakes in equity, credit, and hybrid deals – and across
private equity, real estate, and infrastructure – with a purview essentially of any promising deals that don’t fit into its existing funds.
“This program allows the flexibility to invest across a wide range of opportunities beyond the scope of existing mandates we have in funds,” said Bruce Flatt, CEO at Brookfield, on its second quarter earnings call earlier this month. “The funds could be deployed across the risk reward spectrum, so some returns could be in the low teens and some are opportunistic returns. They just don’t fit the mandates of our flagship strategies.”
The model Brookfield is using echoes strategies from several of its large private fund peers, most notably Blackstone, which has raised $29.6 billion in capital across various vehicles and coinvestments since the 2012 launch of its tactical opportunities business.
Others plying the area include Ares Management, which has $2.9 billion in a special opportunities fund that targets minority stakes in “stressed, distressed and opportunistic situations,” and TPG
Sixth Street Partners, a TPG affiliate whose Adjacencies funds have about $9.3 billion, with a heavier focus on credit investments. And Fortress Investment Management has run a hybrid
version of the strategy since 2002, when it launched its Drawbridge Special Opportunities vehicle, which is in a hedge fund format, but often targets illiquid assets that don’t fit in its private equity strategies.
Hedge funds were the earliest players using the approach, with larger managers moving beyond their single-strategy models to add special opportunities themes to grab a broader set of assets,
says Alan Pardee, managing partner at Mercury Capital Advisors, a placement agent.
“Hedge funds created a box-for-everything strategy, and Blackstone looked at that and said, ‘Why can’t we do it?’” he says, noting that Blackstone applied it to a drawdownstyle
private equity format. “It was a stroke of brilliance… And it’s no surprise that anything successful has its imitators.”
But it’s also an area that may not end up with a lot of competitors, because investors will likely only favor managers that have a broad set of products – and expertise on a wider range of investments – to populate these “all-other buckets” with viable deals, Pardee says.
“Blackstone proves there is demand for it, but we’re not sure there is demand for somebody to apply this strategy in areas where they don’t have experience,” he says. “The appetite from investors for funds with a very broad mandate across a lot of things will only be for the larger firms that have a lot of different ways of attracting deal flow.”
One way that smaller players might compete on the margins of this investment style is to create funds adjacent to their specialties, Pardee adds. “They’re not entrusting capital to a middle market
buyout specialist to go invest anywhere,” he says. “But you might be able to create a special fund that looks at everything else in your own deal flow, including credit [investments] alongside your
In addition to its new special opportunities strategy, Brookfield is also betting big on its long-dated funds, launched in 2016 and 2017. It expects to raise $50 billion each in separate real estate, infrastructure, and renewable energy strategies over time in open-end funds designed to hold assets longer than typical private vehicles, while targeting 7% to 11% returns. Those funds have to date brought in about $5 billion, Flatt said on the recent call.
And even though Brookfield only recently closed its flagship opportunistic real estate fund and may soon close its flagship infrastructure strategy, it may be back in the market with successor funds relatively soon, because each of those new vehicles is already 50% invested, Flatt said. “So… the follow-on funds come relatively quickly afterwards,” he said, later noting that Brookfield’s fund documents allow it to pursue a successor vehicle after investing 75% of the prior version.
Brookfield is also set to add another $124 billion to its coffers sometime this fall when its deal to acquire Oaktree Capital Management is set to close.