Buyout Firm TPG to Try Hand at Fund

Lots of real-estate funds that used piles of borrowed money to buy risky properties got crushed during the financial crisis.

ST Residential

A TPG partnership acquired this Los Angeles building.

Now, buyout firm TPG Capital is offering a new twist while mining some of the same territory with its first real-estate fund.

The firm expects to start raising money in the second half of 2013 with a target of at least $1 billion, said people familiar with TPG's plans. TPG officials acknowledged plans to raise a fund but declined to discuss specifics or timing.

If TPG raises that amount, it would be the second-largest initial property fund ever, trailing only the $1.6 billion that Lehman Brothers raised in 2001 with its first fund, according to data tracker Preqin.

Most real-estate funds that aim for double-digit returns search for office towers with high vacancies, financially strapped hotels or other distressed buildings they can buy at a discount, fix and sell within a few years. Like these funds, TPG says it is looking for troubled projects that need fresh capital or new management.

But in contrast with most peers, TPG has been acquiring property-related companies and large portfolios of buildings with capital staked by a TPG private-equity fund and two partners. The firm is betting this same buyout-like strategy of acquiring complete businesses�instead of adding one property at a time�will distinguish it from other real-estate managers on the fundraising trail.

"We combine sound property capabilities with corporate-style investing, which TPG has significant expertise in," said Kelvin Davis, who co-founded property investor Colony Capital in 1991 and currently heads TPG's real-estate group.

He says buying whole companies is a more complex business that deters many other property owners and relies less on borrowed money.

TPG has invested more than $2 billion for 10 real-estate-related acquisitions since 2009�from a portfolio of Silicon Valley office buildings to a Dutch property company that collects offices and warehouses. Taylor Morrison, a home builder that a TPG partnership acquired in 2011, plans to sell shares in an initial public offering in the coming weeks.

Mr. Davis declined to discuss overall return figures for real-estate investments.

But according to the New Jersey state pension fund that invested with TPG last fall, the first $1 billion of the $2 billion it has invested in real estate has appreciated about 30% as of October.

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TPG Capital founding partner David Bonderman

KKR & Co., another well-established private-equity firm, also began investing in real estate recently. After relying on money from the firm and other KKR funds for the past two years, it is edging closer to raising its own dedicated real-estate fund, say people familiar with the matter.

TPG and KKR are arriving late to the real-estate fundraising game. Rivals including Blackstone Group and Carlyle Group raised multibillion-dollar funds several years ago to buy property, which have generated large fees and boosted their firms' income.

Raising a large new fund also comes at a challenging time. While there are recent signs that some large institutional investors are warming again to high-risk real-estate funds, many of the biggest remain sour on them after suffering big write-downs.

In their peak in 2008, North American closed-end real-estate funds raised $71.2 billion in capital, according to Preqin.

Last year, the total was just $38.5 billion. That included a $13.3 billion fund from Blackstone Group, which raised a record amount despite the tough climate. Excluding the Blackstone fund, last year would have had the smallest amount raised since 2003.

Making it more challenging for TPG, "there has been a steady decline in investors who will invest in first-time" real-estate funds, said Andrew Moylan, Preqin's manager of real-estate data.

The Fort Worth, Texas-based private-equity firm has relied on its $19 billion global fund and arrangements with two institutional investors for the money it has invested since 2009. But there is a limit to how much TPG's global private-equity fund will commit to real estate. To expand its real-estate reach, say analysts, it needs to raise a fund dedicated to property investment.

TPG is one of the world's biggest and most successful private-equity managers. Formerly known as Texas Pacific Group and founded by David Bonderman and Jim Coulter, the 21-year-old firm has $54.5 billion of assets under management and long-term relationships with institutional investors.

TPG has a history of high-profile acquisitions, including Neiman Marcus, Burger King and Petco.

Timothy Walsh, director of the New Jersey Division of Investment, which manages about $71 billion in state pension money, said he met with TPG officials at a private-equity conference two years ago. Last fall, New Jersey agreed to invest $350 million with TPG's real-estate group. "They are not buying buildings, but operating companies, that's what appealed to us," he said.

The other big investor with TPG's real-estate program is Ivanhoe Cambridge, the property investor for Canadian pension manager Caisse de depot et placement du Quebec. Ivanhoe Cambridge provided more than $600 million, said William Tresham, president of global investments.

In May, TPG bought a 43% stake in the office-focused real-estate investment trust Parkway Properties Inc. Parkway's share price is up about 86% since then, making it the top-performing U.S.-listed REIT over that period, according to financial research company FactSet.

TPG and Starwood Capital Group led a partnership, known as ST Residential, that acquired the residential assets of the failed Corus Bank from a government auction in 2009. The group has disposed of property and loans representing 70% of the $2.8 billion purchase price, TPG said.

Write to Craig Karmin at craig.karmin@wsj.com