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Inside One Fund Manager’s Strategy for Pitching CRE Debt to Accredited Investors

Forum Capital buys real estate debt and repackages it into funds to make it accessible for retail investors.

Investors searching for income often say they want more opportunities to invest in commercial real estate debt, and Denver-based Forum Capital Advisors LLC is one firm that is listening. The asset management firm has introduced a fund that aims to deliver monthly income with a commercial real estate debt fund that is accessible to accredited investors.

The Forum CRE Income Fund (FCREIF) may look familiar to some investors. It has the same management team, investment goals and thesis as its predecessor fund, the Forum Integrated Income Fund, only in a new regulatory wrapper. Forum Capital converted the prior fund to a ‘40-Act private placement format in May to make it easier to distribute broadly, as well as make it more amendable to investors with features such as quarterly liquidity, monthly distributions, dividend reinvestment plans and monthly access and pricing.

“It was really an effort to make it a fund that was more investor-friendly and easier to use,” says David Kasprzak, senior managing director at Denver-based Forum Investment Group. FCREIF is designed to provide access to commercial real estate debt investments at a time when investors are looking for better portfolio diversification alternatives and new income options, he adds. Forum Capital Advisors is a boutique asset management firm and affiliate of Forum Investment Group.

WMRE recently talked with Kasprzak to hear more about the fund strategy and his views on investment opportunities ahead for CRE debt.

This Q&A has been edited for style, length and clarity.

WMRE: FCREIF invests specifically in commercial real estate debt investments. Can you describe your strategy in terms of the types of debt and where you are placing capital?

David-Kasprzak.jpgDavid Kasprzak: The fund is focused on acquiring commercial real estate debt of all colors. Calling it opportunistic would not be appropriate, because that would indicate that the fund is looking for distress, and that is not the case. However, I will say that during the COVID downturn we were able to purchase some attractive issues that had been priced down significantly in reaction to the COVID environment. Those opportunities have since priced back up, which has allowed us to grab some significant upside.

From a portfolio manager’s viewpoint, having latitude to move around is pretty attractive. The fund allows for purchases of private and public real estate debt and does not have mandates or limitations on the size of the loans or the type of issues that we look for. Again, that flexibility for the portfolio manager is attractive and really brings it down to the fundamentals of the underlying issue, the sponsor of that particular debt and the real estate that supports it as to whether or not we would want to invest in it.

As long as the fund invests in commercial real estate debt, it is really up to the portfolio manager, Pat Brophy, our internal debt team at Forum and also the debt team at Janus Henderson who is our strategic partner on this fund, to source the deals, conduct the analysis and due diligence on the issuer and the underlying real estate, and then present that to the investment committee for approval.

WMRE: So, you are buying loans and not originating debt?

David Kasprzak: Correct, we are buying existing debt. The team at Forum has experience in originating loans and we do have latitude in the portfolio to be able to originate loans, but in this case, we are buying loans. Right now we’re focused on permanent loans. We do have the ability to look at mezz debt and preferred equity, but that is not a focus right now.

WMRE: Where are you sourcing loans from?

David Kasprzak: Primarily banks and also the vast amount of contacts we have on the private side.

WMRE: Your announcement noted that the new fund was motivated in part by strong performance of Forum Integrated Income Fund and in response to feedback from existing investors. What do you think is driving investor interest in debt?

David Kasprzak: First and foremost, yield and income continue to become increasingly difficult to find and access in this low interest rate environment. Quite broadly, investors are struggling to find income-producing investments. We hear that loud and clear. It’s no secret, but what does the industry do to address that? We have found that our first offering, the Forum Integrated Income Fund, really grabbed the attention of investors. Next, we really think that the low correlation of the asset class to the broader public markets and to public issues is another factor that is driving people to look towards debt as they try to reduce volatility of their portfolios and lower their overall correlation to the marketplace.

Finally, access to quality managers is an ongoing issue, particular those with a more institutional slant. Institutional managers often get a first look, particularly when it comes to debt and private equity. So, you put all of those together and it is driving a significant amount of interest in the debt space generally. Commercial real estate debt is really now just starting to look attractive because of the traditional lack of access, plus awareness. There have been some misconceptions in the past with investors, and frankly with some wealth managers as well, as to what exactly commercial real estate debt entailed.

WMRE: What type of returns is the FCREIF targeting?

David Kasprzak: We’re targeting 5 percent to 6 percent cash returns, and we’re paying dividends and distributions on a monthly basis. Being able to see those type of cash returns is key in continuing to drive interest from investors. We’ve heard that from investors and their advisors as well. We also target moderate capital appreciation on top of those cash returns. That will lead to a high single-digit or low double-digit return. The other key to that is making sure your distribution is covered. There has been a tendency in the industry to not do that, particularly with some of the non-traded REITs. We very quickly got to a covered distribution situation.

WMRE: Can you share any numbers on how large the FCREIF fund is currently and if you have any specific goals?

David Kasprzak: After our August close at the end of the month we expect to be right around $70 million to $75 million, and I anticipate that next year at this time we will probably be pushing the $175 million to $200 million mark. Every year thereafter we would be set to add a couple hundred million dollars in AUM on top of that. For us, thoughtful growth is really important. We have seen a lot of real estate funds in the industry, of all sorts, grow exponentially with explosive numbers. I’m not sure that is always the best for investors, because I don’t know that fund managers can source deals that quickly. That kind of explosive growth is tough for an asset manager to allocate to. So, our approach of thoughtful asset allocation will serve us very well in the long run.

WMRE: The minimum investment amount is $50,000. Who are your main investors?

David Kasprzak: Because it is a private ‘40 Act fund, the target audience is accredited investors. As we sit currently, the investor base is primarily high-net-worth investors who access us either directly or via an allocation by their wealth manager. Some of those high-net-worth relationships that we have had over the years were single- and multi-family offices, but primarily it is high-net-worth individuals who are investing with us. At some point, we could convert to a public 40 Act, at which point it would be available to all investors.

WMRE: What channels do you use to source your investors?

David Kasprzak: Traditionally, we have been word-of-mouth and referral based on our investments, for our direct syndicate deals and for our FCREIF and its predecessor fund. Now what we’re seeing is that we are starting to pick up some momentum in the wealth management space, particularly with registered investment advisors.

WMRE: Do you run into any special issues in working with those HNWIs or family offices?

David Kasprzak: There really aren’t any issues. What they look for is a high level of service, and the key to what we do is provide a superior investor experience from top to bottom. Whether it’s how they get their paperwork processed, receive updates or how timely they get distributions, we really feel that that is what they want. We also think that in the family office and high net worth side, they truly appreciate a higher level of quality communication and transparency, and there is a quantity versus quality aspect. Sending out frequent information, if it doesn’t hold value, is useless to them. What they like is really good quality, high touch information. A great example is that we provide monthly updates on the portfolio. That is not necessarily the norm in the ‘40 Act world, but that’s what we feel our investors deserve.

WMRE: There has been a lot of capital raised for debt funds in recent years. How competitive is that market in terms of sourcing debt, and what kind of opportunities are you finding?

David Kasprzak: It is competitive, but what is interesting is that the debt market has been split into multiple channels. You have private debt, corporate debt, public real estate debt and private real estate debt. So, there are a lot of sub-tranches within debt in general. There has been a lot of publicity about the amount of capital that has flowed into debt over recent years. But if you look at that capital flow as a percentage of the overall capital markets, it’s really fairly miniscule, and we believe that we are only scratching the surface.

Is there competition? There is always competition for quality issues. We believe we can get a leg up on some of our competition through relationships. If you know a private issuer that is taking something to the market for a raise, you may get a look ahead of everyone else. Those relationships are irreplaceable. Between our network and the network that we have at Janus, we see many investment opportunities on both the public and private side of real estate debt, and certainly our investors have reacted positively to that.

WMRE: What kind of runway do you see ahead for CRE debt funds in particular?

David Kasprzak: When compared to the greater universe of assets, debt is hardly utilized in investor allocations and real estate debt even less so. I think the remaining opportunity is more than significant. To me, this starts with an investor and an advisor getting educated on exactly what debt and real estate debt means and getting that level of knowledge and comfort. Then we keep them interested when they see the results that could be generated through investment in real estate debt, particularly when compared to some of the other asset classes and types. When you consider some of the volatility that we have seen in financial markets over the last 20 years, finding yourself in good real estate debt should dampen that volatility. So, we continue to believe that the market is going to continue to come to us, and we are quite excited about the amount of runway we see ahead.

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