For the last five years, David St. Pierre, president of Legacy Capital Partners, had the idea to create a private equity fund focusing on investment for the long-term. In October of 2004, St. Pierre began the fund initiative and raised $44 million in six weeks. According to St. Pierre, many real estate professionals do not approach the business from a merchant-builder mentality. Instead, they tend to look at the business with a philosophy that “good things happen to good real estate,” and if you are fortunate enough to control good real estate you don't sell it — or you don't sell it very often.
Many of these developers use outside capital and because their long-term strategy is inconsistent with the short-term approach of the majority of capital sources that are available, they are required to invest their own capital or they raise equity from “friends and family” or “country-club” equity. St. Pierre says this can be a very good source of equity, but it can also be a very inefficient process. There in lies the opportunity to bring developers a capital source consistent with their long-term strategy.
NREI: How would you define your product type?
St. Pierre: We are focused on retail and multifamily investment opportunities, but we also consider other property types. Our objective is to be invested during an 18-36 month development period of a project and then stay invested during the 10 years after the project is refinanced. At the end of the 10-year permanent loan, we would look to exit the investment either through a sale of the asset to a third party, or the developer partner would buy out our interest. At the end of 10 years, as the result of continued appreciation of the asset and the amortization of the senior loan, the developer partner should have the flexibility to re-leverage the property to buy out our interest and continue to own the asset.
NREI: What is your role as a capital provider and what makes you unique?
St. Pierre: The fund is a provider of equity capital and was not created to make senior loans or to make mezzanine loans. Our objective is to invest in various new development or substantial re-development projects as a non-managing equity partner. Our objective is to align our investment strategy and timeframe with developer partners whose goal is building value through longer holding periods.
NREI: What is your investing strategy approach to development financing?
St. Pierre: If a project has a total cost of $25 million and can secure a $20 million construction loan, the fund is looking to invest $4.5 million, or 90% of the required equity, with the developer partner providing $500,000 or 10% of the required equity. The fund has a life of 15 years and can be extended for three additional one-year periods for a total of 18 years. A 15-year term makes us very unique and will allow us to focus on providing developers with a reliable source of patient equity capital.
NREI: What type of returns are you seeking on the investments that you make?
St. Pierre: As long-term investors we are not IRR driven, so our return expectations are a little unique. Our targets are two-fold: (1) upon refinancing, the project will return at least 50% of our original invested capital, and (2) our residual equity — the 50% that remains invested in the project — will receive at least a 20% cash-on-cash return. Our belief is that if you have the right real estate, the right operating partner, you can achieve these two objectives.