The Wall Street Journal - 31.07.2019

B6| Wednesday, July 31, 2019 THE WALL STREET JOURNAL.

THE PROPERTY REPORT

that strategy. The firm has

purchased about $30 billion of

real estate since 2012 but

primarily using its own capital,

people familiar with the matter

said.

Under the new strategy,

Goldman hopes to launch a se-

ries of real-estate funds start-

ing with the $2.5 billion fund

that will look for property in

the U.S., Europe and Asia. Gold-

man hopes to launch a second

fund toward the end of next

year, these people said.

Goldman already has

started purchasing property

that will likely be included in

the fund, including a stake in a

4,300-bed portfolio of student

housing in Orlando, Fla., Tuc-

son, Ariz., East Lansing, Mich.,

and other cities from Chicago-

based Core Spaces, the devel-

oper and operator. The deal

valued the portfolio at over

$600 million.

The bank is consolidating all

its real estate activity—which

include a mezzanine debt fund

business and equity invest-

ments made by the firm’s spe-

cial-situations group —in the

merchant banking division. The

operations now have offices in

the U.S., Europe and Asia and

employ more than 350 profes-

sionals.

The business “had grown to

a scale where the opportunities

we were seeing exceeded the

aggregate capacity of the bal-

ance sheet,” said Julian Salis-

bury, one of the new co-heads

of merchant banking who over-

sees real estate.

Goldman’s new real-estate

fund business aims to take on

less risk and target lower re-

turns than the Whitehall funds

did.

The new fund will limit debt

on property to no more than

60% of its value and target re-

turns in the 12% to 15% range.

Whitehall aimed for annual re-

turns in the high teens and its

leverage would sometimes ex-

ceed 80%. Goldman expects to

increase leverage in future

funds, the people familiar with

the matter said.

Goldman also will seek to

raise capital for the new real-

estate fund from both institu-

tional investors and wealthy in-

dividuals. Whitehall raised

most of its money from the lat-

ter.

Goldman will “invest a lot of

our money” in the new real-es-

tate fund, just as the firm and

its employees put their money

in the Whitehall funds, Mr.

Salisbury added.

Goldman’s real-estate busi-

ness wasn’t the only one to get

clobbered after making big bets

late in the previous real-estate

cycle.

Property losses at Lehman

Brothers Holdings Inc. were a

major cause of its demise. Mor-

gan Stanley’s real-estate busi-

ness also suffered major losses

and stopped raising private-eq-

uity funds for years after the

crash.

But Goldman has been late

in getting back to the real-es-

tate fund game. Morgan Stan-

ley closed its first-post crash

private-equity fund in 2015 at

$1.7 billion. It raised an addi-

tional $2.7 billion fund in 2017.

Mr. Solomon’s reorganiza-

tion remains a work in prog-

ress. The leadership of the new

real estate group has been set,

but it is still not clear how well

the different groups from dis-

parate parts of the Goldman

empire will work together in

the fiercely competitive

culture.

Goldman also has to deal

with the ghosts of Whitehall.

Because that fund family was

known so well, the name often

comes up, creating a potential

obstacle for Goldman’s sales

force when approaching

investors for new commit-

ments, according to industry

participants.

The Whitehall reputation

will “make the initial conversa-

tions a little bit harder,” Mr.

Salisbury said. But he predicted

that once investors start “peel-

ing back the onion” they’ll real-

ize “this is going to look like a

very compelling, well-aligned

opportunity for people to in-

vest alongside Goldman Sachs

and its employees.”

—Liz Hoffman

contributed to this article.

Goldman Sachs Group Inc.’s
newly reorganized real-estate
investment unit is reviving a
fund business that the firm
shut down after it suffered
steep losses during the finan-
cial crisis.
The new group is raising a
$2.5 billion real-estate fund
structured similarly to the for-
mer Whitehall family of prop-
erty funds, according to people
familiar with the matter.
This business thrived in the
1990s and early 2000s, turning
big profits on deals such as
New York’s Rockefeller Center
and Canada real estate giant
Cadillac Fairview Corp.
But Goldman quietly let the

BYPETERGRANT

program expire a few years ago

after it ran aground with

soured bets like New York’s

Helmsley Building and the

Stratosphere, a Las Vegas ca-

sino that Goldman sold in 2017

for about $450 million less

than it paid for it a decade ear-

lier, according to people famil-

iar with the matter.

One Whitehall fund, which

invested near the top of the

market before the 2008 crash,

once reported a value of less

than 20 cents on the dollar,

though it eventually returned

investors about 75% of their

money, these people said.

The new real estate unit is

part of a broader reorganiza-

tion engineered by Goldman

Chief Executive David Solomon,

who took over last fall. Mr. Sol-

omon wants the firm to focus

more on making investments

for third parties and generating

fees.

The real-estate business will

be a prime testing ground for

Goldman

Revisits

Real Estate

Investment bank to

raise $2.5 billion to

revive a fund business

that once thrived

ing experience.”

Compass’ previous funding

round, which valued the firm

at $4.4 billion, was in Septem-

ber. Since then, the firm has

expanded to about 13,000

agents nationwide from about

7,000.

The latest funding round

comes during a heated venture

market. Capital is chasing

high-growth companies at un-

precedented levels, benefiting

numerous real-estate compa-

nies including Compass and

Opendoor Labs Inc.

Earlier this month, Com-

pass was sued by competitor

Realogy Holdings Corp. the

parent company of Corcoran

Group, Sotheby’s International

Realty, Coldwell Banker and

other real-estate firms, which

claimed Compass had engaged

in unfair and illegal practices

to gain market share.

Realogy accused Compass

of pilfering trade secrets and

encouraging agents to break

their noncompete agreement.

Compass denied the allega-

tions.

Goldman Sachs has started purchasing property for a new fund, including a stake in this student housing complex in Orlando, Fla.

EVE EDELHEIT FOR THE WALL STREET JOURNAL (2)

Compass raised $370 mil-

lion in a deal that increases

the real-estate brokerage’s val-

uation to $6.4 billion and indi-

cates the firm is nearing an

initial public offering.

Compass announced its lat-

est funding round on Tuesday

and said it increased its total

capital raised to more than

$1.5 billion since it launched in

2012. Investors in the round
      include Dragoneer Invest-
      ment Group. Some of the
      firm’s existing investors, such
      as SoftBank Vision Fund ,
      Canada Pension Plan Invest-
      ment Board and the Qatar In-
      vestment Authority , also con-
      tributed more money.
      Compass is expected to
      roughly double its revenue
      this year to about $2 billion,
      according to a person familiar
      with the matter.
      New York-based Compass
      has shaken up the real-estate
      brokerage industry in recent
      years by luring top agents
      with generous commission
      splits and stock options and,
      more recently, fronting sellers
      money to spruce up their
      homes for sale. The firm’s
      deep pockets have left incum-
      bent competitors struggling to
      keep up amid a slow housing
      market and shrinking margins.
      San Francisco-based Drag-
      oneer has a record of late-
      stage venture-capital invest-
      ments that often precede IPOs.
      For example, the firm joined
      rounds for companies such as
      Slack Technologies Inc. and
      Uber Technologies Inc. in the
      run-up to their public offer-
      ings.
      A person familiar with
      Compass’s plans said Drag-
      oneer’s involvement in the re-
      cent round is a sign the bro-
      kerage firm is considering a
      public offering in the near
      term. A spokesman for Drag-
      oneer declined to comment.
      Compass Chief Executive Rob-
      ert Reffkin declined an inter-
      view request.
      Compass has branded itself
      as a technology firm, touting
      the online tools it has devel-

BYKATHERINECLARKE

ANDYULIYACHERNOVA

Compass Funding Round

Yields $6.4 Billion Valuation

Compass Chief Executive Robert Reffkin in New York

GO NAKAMURA FOR THE WALL STREET JOURNAL

oped to help agents produce

pitching materials and com-

municate with clients about

listings. But the firm hasn’t

changed the way people buy

and sell homes. Its business

model functions much like leg-

acy firms with traditional

commission rates for agents.

Compass said it would use

the new capital to invest in its

technology and further expand

its tech teams on the East and

West coasts. Compass

launched its engineering hub

in Seattle earlier this year and

plans to staff it with roughly

100 engineers to build what it

has dubbed an “end-to-end

software platform to stream-

line the home buying and sell-

The firm said it

would use the new

capital to invest in

its technology.

Business Real Estate & Auctions

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