South Street Partners, a Charlotte and Charleston-based manager which focuses on the residential and resort sectors, closed its inaugural discretionary fund at $225 million – far exceeding its $100 million target. And although the firm is seeing traditional lenders like banks and insurance companies slow their lending, there is still ample liquidity for well-capitalized specialist managers.
The SSP GP Fund I seeks opportunistic, value-added and special situation investments in the residential sector in the Southeast US and could have as much as $2.25 billion of buying power, Chris Randolph, partner, told Real Estate Capital USA.
“[These markets] are primed to outperform long term in the post-covid investment environment,” Randolph said.
The firm believes the fund being oversubscribed by double its target can be attributed to its track record and expertise in its target markets within the Southeast region and the Sun Belt. While today’s volatile debt markets do not affect the firm’s residential strategy, since it looks at acquisitions on an unlevered basis, it does finance cashflow-producing assets such as hotels with debt.
“And that market has gotten materially more difficult and more expensive in the rising rate environment,” Randolph said.
The debt markets are liquid right now, according to Randolph. “However, the traditional lenders such as banks and life companies have pulled back significantly from the hospitality financing market.”
The firm is also considering current market disruptions caused by inflation, rising rates and geopolitical uncertainty.
“While nothing is recession-proof, we believe our current portfolio is defensively positioned to withstand the current market volatility via low-leverage, long-term equity positions and strong operational models with recurring cashflow streams,” said Randolph. “Inflation and interest rate hikes may slow sales but the consumer demand for our unique properties has not waned.”
The GP fund aims to scale its portfolio via a strategy of partnering with institutional investment firms on large-cap transactions as well as pursue small and mid-cap deals utilizing the fund’s balance sheet.
While the fund has the ability to invest across all real estate sectors and regions, it is mainly focused on private residential club communities and resorts, primarily located in drive-to markets.
“These regions and asset classes have benefited from the in-migration and travel patterns of Americans over the last two decades, which was only further accelerated by the covid-19 pandemic,” said Randolph, adding that temperate climates, tax-efficient policies and business-friendly municipalities are just a few of the many reasons for these trends.
The fund’s first two investments include Palmetto Bluff, a private residential club and resort, and Kiawah Partners, a residential portfolio, both in South Carolina.
“In terms of new investments, we are being very patient and selective in this current market environment,” Randolph explained. “That said, we are still finding interesting, off-the-run opportunities for our investors.”
The firm also expects to generate co-investment opportunities for its limited partners.