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What Opportunity Zone fundraising trends can be gleaned after raising $465 million? And what’s next for Opportunity Zones in the midst of the coronavirus pandemic?
Nick Parrish is managing director and head of business development at Cresset Partners, a multifamily office that specializes in alternative investments in real estate, private capital, and Opportunity Zones. Their first QOZ fund closed earlier this year after raising $465 million.
Click the play button below to listen to my conversation with Nick.
- How Cresset was able to raise $465 million in Opportunity Zone capital in a little over a year.
- Why Cresset initially approached the Opportunity Zone incentive with skepticism and caution.
- Opportunity Zone capital raising trends: how early movers were family offices and 1031 exchange investors, and how broader adoption more recently has produced a wider dispersion of investors.
- Why Cresset shied away from including private equity investments in their Opportunity Zone fund.
- The benefits and challenges of having a multi-asset class Opportunity Zone fund.
- How Cresset enabled larger investors to invest in project-specific SPVs within their larger multi-asset fund.
- The effects of the current coronavirus pandemic on fundraising and deal activity: how financial uncertainty has resulted in market paralysis, with a silver lining of capital gain recognition that may drive market activity later in the year.
Featured on This Episode
- Nick Parrish on LinkedIn
- Cresset Partners
- Opportunity Zone funds have raised more than $10 billion, exceeding expectations
- Avy Stein
- Eric Becker
- Willis Stein
- Sterling Partners
Industry Spotlight: Cresset-Diversified QOZ Fund
Cresset Partners, led by Eric Becker and Avy Stein, and Diversified Real Estate Capital, led by Larry Levy, partnered to create the Cresset-Diversified QOZ Fund. The Fund is managed by an experienced team of investors along with legal, tax and accounting experts. Cresset-Diversified QOZ closed their first fund in Q1 2020 after successfully raising $465 million. The team subsequently opened up Fund II which is now open for investments.
Learn more about the Cresset-Diversified QOZ Fund
About the Opportunity Zones Podcast
Hosted by OpportunityDb.com founder Jimmy Atkinson, the Opportunity Zones Podcast features guest interviews from fund managers, advisors, policymakers, tax professionals, and other foremost experts in opportunity zones.
Jimmy: Welcome to the Opportunity Zones Podcast. I’m your host, Jimmy Atkinson, the Cresset-Diversified QOZ Fund closed earlier this year after raising $465 million, making it among one of the largest opportunity zone funds in the country. Now, they are preparing to launch the Cresset-Diversified QOZ Fund II. Joining me today is Cresset’s managing director, Nick Parrish. Nick comes to us today from his home office in Chicago. Hey Nick, thanks for joining and welcome to the show.
Nick: Thanks for having me, Jimmy.
Jimmy: Yeah, it’s great to be chatting with you. Really impressed obviously with how much capital you were able to raise over just the last five quarters. We were chatting just a minute ago before I hit the record button before we went live about the Novogradac survey that has recently been released demonstrating that among the funds that they had surveyed, over $10 billion has been raised by opportunity zone funds to date here and you represent close to 5% of that number. So obviously a very large fund that you have there and raised just over the last five quarters approximately, and among the largest opportunity zone funds in the country, as I mentioned. Can you tell us a little bit about that capital-raising effort, the journey that your company went on to raise that amount of capital and how you’re able to achieve it in such a relatively short time frame?
Nick: Yeah, so happy to walk you through it. And listen, our story is a combination of probably skill and some luck. You know, when we embarked on this effort in late 2018, I think we like everyone else, we’re intrigued by the potential merits of and the attractive tax benefits of the opportunity zone program. But we had a healthy dose of skepticism as well. I mean, it was a new program. You know, it was at that point under 12 months old. It’s a complicated program. It was a program that was based on draft regulations, not final regulations. So there was a lot of complexity around it.
And so I think we approached it with caution, but ultimately our focus was on investing in good, high quality assets in many cases, assets that we would wanna otherwise own where you could find that good balance and that cross section between opportunity zones and again, high quality longterm investments. And so our view in focusing on those, aligning ourselves with top tier partners and great talent I think really drove a lot of that success. And so we were we were early to the game and we thought that was important as well. I think the view that there are only so many of those places where you do find the alignment of these opportunity zone and these high quality investments, we felt like those to the market first would be able to take advantage of those.
And so we based on that. That principal launched an effort in December of 2018 and our journey was not a linear one as I’m sure most were. I mean this was again, a new program and it took a period of time for investors to first to understand the mechanics of the program and how it works and then two, ultimately for high quality of firms like ourselves and a few others to emerge it’s kind of real investible options. And we were fortunate and ultimately that combination of things gave us a lot of momentum. And we were fortunate that by the earlier part of this year had over $460 million in capital roundup for these opportunities. So we’re excited to be kind of one of the the pioneers if you will in this space.
Jimmy: I definitely agree with that. You guys certainly are one of the pioneers in the space. Just for the amount of capital that you’ve raised, very impressive. I wanna talk about your investment strategy in a minute, but first I wanna ask a little more about capital raising. What types of investors are you seeing coming into the fund? Maybe you can give me a sense of the average investment size, how many investors you have roughly. And have you noticed any trend or shift in the types of investors that you’ve seen come in over time as it relates to either family offices or advisors or through the direct retail channels?
Nick: Sure. Yeah. So you know, I think first of all, what is very unique about opportunity zones is some of the mechanics that govern who is eligible to invest. So unlike any investment opportunity or fundraise before investors have very strict time limits. They are limited to obviously the capital gains only. And so this is not your traditional fundraise. I tell people you got to take everything you knew about private equity or real estate fundraising and throw it out the window because these different mechanics create very, very different incentives for investors and create different challenges and pockets of opportunity.
I think for us initially, those timing constraints and deadlines drove a lot of the early activities. So I think a lot of what we saw initially were people who had finite liquidity event, meaning they sold either a piece of property or a business and they were on the shot clock. They had 180 days. They had a tangible gain that they had that was eligible to invest and they knew they needed to deploy that capital and had to find a solution. So they didn’t have the luxury of hemming and hawing and waiting for a different fund to come online. They were kind of driven toward the solutions that were at hand.
And so that was our early investor base. Our firm was founded by a couple of private equity investors and entrepreneurs. A lot of the folks in our ecosystem and our client base are a lot are entrepreneurs. So we had a strong network of people who were entrepreneurs who were regularly selling assets, selling businesses. And so that was an early group. I think the other interesting one too was also real estate investors who had traditionally used 1031 exchanges as a way to defer and avoid taxation where they were constantly on that cycle of 1031 and like kind exchanges.
Opportunity zones emerged as a interesting and in many ways more flexible and less onerous way to defer and ultimately to deflect those taxes. So early on, we saw a lot of real estate investors look at this as an alternative for 1031 exchanges. So that was a a significant amount of our client base early on. I would also say some of the early movers were single family offices. You know, that tends to be a segment of the market in which we operate. As also a large multifamily office we tend to network with a lot of those single family offices. They tend to be a little bit more willing to be an early mover of an opportunity.
And so that was our client base initially. I think what we saw over time was an evolution as regulations became final, as more investors adopted opportunity zone strategies, as we started to get projects done. I think, yeah, a very critical milestone in our fundraising was when we broke ground on our first project, which was a large 40 story, 46 story apartment tower in Downtown Houston that we’re building in partnership with Hines. I think seeing that caliber of investment opportunity within a QOZ program really went to validate the thesis.
And so following that, you saw a much broader adoption from wealth advisors, financial advisors, other high net worth investors who weren’t necessarily doing this because they had a particular gain to shelter, but viewed this as a way to potentially reposition their portfolios in the longer term real estate to trigger some pent up capital gains on their balance sheets from accumulated stock positions or other assets that may have experienced a gain over the last 10 years.
So we saw a much broader adoption and as a result when you look at our fund the $465-ish million that we raised we see a wide dispersion today of investors anywhere from a couple $100,000 kind of accredited investor clients up to we have a few in the $20 million and $25 million range, so really a pretty wide dispersion among clients and investor types.
Jimmy: And some of those smaller investors coming in more on the tail end, is that right?
Nick: Yeah, I think so. I certainly…it feels like that was the momentum and I think depending on how COVID and the related financial crisis plays out, I do think that that will be a significant part of Fund II. Again, just thinking about the life cycle of the opportunity set, I mean, this has now, I think proven to be an opportunity set and the program is here to stay. I think some folks have proven their ability to, again, raise good, high quality, for lack of a better term, institutional caliber firms. You know, and that’s gonna create a lot broader comfort in the market and we would expect as a result broader adoption from kind of advisors and individual investors.
Jimmy: Yeah. It seems that public awareness of the program is still a challenge that the community of opportunity zone participants is struggling to overcome. But as time goes on, public awareness becomes higher and higher, more high net worth individuals becoming aware of the program, it becoming more ingrained in the financial advisor, wealth advisor community as well. You mentioned the project that you’re undertaking with Hines. Can you tell us a little bit about Cresset’s overall investment strategy of the opportunity zone fund and at what regions and asset classes primarily are you investing in?
Nick: Yeah, it’s a good question. So again, kind of going back to initially how we got involved I think we, again, we were intrigued by the opportunity set. But as we read about the requirements, the tax benefits, again, the real magic of this program, you have your deferral of your capital gain from the asset you sell. That’s nice. Depending on when you invest, you have a slight reduction in the capital gain liability that comes due on that. That’s also a nice benefit of the program. The real benefit of this is being able to invest into these opportunity zones to be able, to hold them for 10 years, and ultimately be able to sell them without incurring a capital gain. That’ll only make sense if you generate a gain on your asset. This is not like other tax programs where you may get tax credits or deferrals or deflections. You have to have a gain to deflect in order for this to make sense.
And so that really drove our philosophy around again, finding this intersection of good, high quality assets. In many cases, assets we’d like to own. So in markets that we like, the asset types that we would otherwise own and again, with good, high quality partners. That’s what really drove our philosophy. So this was about making good longterm investment decisions. You know, low leverage, longterm assets. This was not a license to go take a bunch of risks. So where we ended up focusing was first of all, solely on the real estate side of things. I think we initially looked at private equity and real estate. And again, a lot of our background is also in private equity. The initial regulations made it challenging to invest in operating companies and businesses in these zones.
So we chose at least this time around to focus predominantly on real estate, and then within real estate focused specifically on development. As you may know, there are some requirements in the program that makes you put up a certain amount of capital in substantial improvements. That’s just much easier to do in the context of development. So focused on development, largely focused on core urban markets, largely primary markets. You know, we like high growth cities. We find that the zones in those cities for a few reasons, tend to support these projects with again, a 10-year longer term horizon tends to be supportive of those.
You know, our mandate is multi-asset. It’s multi-asset class. We do have a bias toward multifamily. I think we feel that multifamily is a kind of asset class that’s better suited for that longterm hold period. But we’ll look at things in office, retail, industrial and in some cases hospitality. And then looking to partner with a couple top tier developers. So that’s really what what drove our investment thesis. So we’ve invested in…you know, our Fund I has seven projects. We invested in markets again, like Houston, Downtown Denver, Portland, Nashville, Washington, DC, Charleston and Omaha. So all fairly substantial urban market.
Jimmy: Okay. Well, I’ve got two questions for you now regarding the multi-asset nature of your investing strategy. First pertains to just the challenges of multi-asset class just within real estate. And I want to ask you a follow up question about your thoughts on mixing private equity into the mix as well. But first, that first question, what are some of the challenges that you face with having a multi-asset class fund?
Nick: Yeah, it’s…you know, listen, we actually, in structuring it we initially went down the path of wanting a multi-asset fund. And we did that for a couple of reasons. One was the view that for longterm tenure plus capital, none of us have a crystal ball. You know, we can do a lot of work on these locations on the projects and the developers. But 10 years is a long period of time. And so the best way that you can mitigate some of those risks is through diversification. And so we felt that for most of our investors, having a good diversified portfolio with some diversification by geography and some by asset type is probably the most prudent and low risk way to approach the space. So diversification was important.
Two, there are some mechanics that, you know… Well, the structure around multi-asset is complex. It does give you some flexibility and timing in terms of how we raise capital and how that capital gets pushed down into some of these projects. It does create some flexibility for us to take in capital and to deploy that to the underlying structures. So those were the two drivers that caused us to launch a multi-asset fund.
One of the things we did do though was given the dispersion of our investor base, as I noted previously, we were able to create a construct where we had at the core a multi-asset fund. But then we created individual, single asset funds, both structured as qualified opportunity zone funds in and of themselves where we allowed investors to co-invest into those projects. So for larger investors that we had, maybe single family offices who had large real estate teams who had experience investing in direct assets, we used those vehicles as a bit of an overflow mechanism to allow investors to access those properties individually. So in some ways we tried to create a best of both worlds, if you will, with that.
Jimmy: Okay. I got you. So different fund classes essentially to allow certain investors to invest in certain projects?
Nick: Yeah, we basically structured them as underlying kind of SPVs which investors, you know… And we were agnostic in terms of fees. So we gave investors the ability to go into the fund or to a certain extent go into individual projects. The only caveat to that was the fund comes first. The fund would ultimately kind of determine its optimal allocation to a project and then the investors, the co-investors would have the right to whatever was kind of leftover. That was important to us as well, by the way. It was a really valuable portfolio management tool for us because we had deals that varied in size.
Our Nashville project for example is $120 million. Our Omaha project was $20 million. Having a portfolio with that kind of dispersion, we wanted the position sizes to be a little a little more comparable. And so we could use that overflow capital as a way to help them size positions in the portfolio.
Jimmy: I got you. That’s clever. Now, for Fund II, somewhat following up on my previous question about multi-asset class fund formation, I wanna ask you about Fund II. Are you potentially planning on now mixing in private equity business investment into that fund as well in addition to real estate? And what would that look like exactly? Might you get any pushback from investors on bringing that in? Would that make capital raising more challenging in some ways or easier in some ways? What are your thoughts on that?
Nick: Yeah. So that’s a good question. I don’t think we are contemplating private equity at this stage. The regulations have become more clear. They’re still not perfect. But I do think there are ways to do it. We’ve just not seen the opportunities emerge. I think in many ways, the real estate development piece of it is the low-hanging fruit. It’s just within the regulations, the easiest to do and where you’re seeing the most deal flow. I think over time, the market will evolve and you’ll start to see more of these private business opportunities out there.
I also think the real estate opportunities are finite. There’s only so many projects that you can do within these zones. Private equity is infinite. You can always create businesses in these zones. So that does not feel to us like an immediate opportunity. And I think…so I think we’re probably not gonna spend much time yet on the private equity side of things. Two, if and when we do, I don’t think we would commingle private equity and real estate into the same fund. We initially contemplated that with our first fund.
I think what we found was when people look at a fund, they like to bucket it into an asset class and having a real estate fund fits clearly into a real estate allocation, same thing with private equity. When you start to commingle those things, you create some complexities and some confusion around where it fits in an allocation, how people should think about return and performance. And I do think to your point that can create some challenges from a fundraising standpoint. So I think at this point, we’re not gonna focus on it yet. And if and when we do, I think we would think about it in a different and separate structure.
Jimmy: Maybe fund three then, right?
Nick: Or maybe 2.1 or something. Yeah. We’ll see. Again, I think we have background in private equity. I think the idea of creating businesses in these zones in many ways goes to the original intent of the program. And so I think we feel like eventually the industry will go there and that there will be opportunities. We just haven’t seen those yet. But certainly we’ll continue to evaluate that as a possibility in the future.
Jimmy: Right. To bring up the Novogradac survey again, they actually did break down by asset class type where the opportunity zone funds are being raised and operating business still accounts for just a tiny fraction of the total amount of equity raised by all the opportunity zone funds in their survey at least. So certainly I think there’s a lot of potential for private equity businesses to get funded through the opportunity zone program, but your point is well taken that that marketplace hasn’t really developed yet and probably real estate investing is more of a sure thing at this point. It has a lot more momentum on its side.
But I’m hopeful that we get some more operating business investment as the years go on here and more opportunities arise. You know, I haven’t really asked you too much about the company yet. I know you got into it a little bit and you noted that it was founded by two private equity entrepreneurs, some background on them. That’s their background. Can you tell me a little bit more about how Cresset was founded and when it was founded and its core philosophy?
Nick: Sure. So Cresset as a business is about three years old. As you alluded to, we were founded by two of my partners, Avy Stein and Eric Becker. Avy and Eric were both lifetime private equity entrepreneurs and fund managers. Avy had built a large middle market buyout firm called Willis Stein. Eric and a group of partners started almost 30 years ago, a growth equity business called Sterling Partners. And both had very successful private equity careers, both as investors and as fund managers.
And unrelated and a number of years ago, significant life events forced both of them to step away from their businesses to focus more on their health, their families, and ultimately what they were doing with their own personal capital. And again, having created their wealth through private investing, they had a deep rooted belief in the value of private markets and felt like longterm investments in private operating companies and real estate was the way that multigenerational wealth was created. And they wanted to form a firm around that philosophy, and the idea of bringing those types of opportunities to a broader network of people who may not have access to those type of idiosyncratic, off the run direct investment ideas.
So they founded Cresset about three years ago and ultimately built a business that was built around the way they were managing capital for their family. So we created a multifamily office where we manage capital on behalf of a group of now, well over 300 families focused on investment advisory, top down investment advisory as well as you know, broad based family office services. So think of it as kind of an outsourced family office model. That side of the business today has about $6.5 billion in AUM, 120 people and 8 offices around the country.
And then related to that, we created Cresset Partners to really focus on sourcing, executing and providing access to private market opportunities. And so Cresset Partners was formed two and a half years ago. And the mission of Cresset Partners is to create investment opportunities for Cresset and the family office there, but also to partner with other single family offices, wealth management firms and in some cases institutions to provide access to these private investments. So we have teams focused on direct private operating businesses and making direct investments there. We have a direct real estate team. We have a private equity secondaries team and now have an opportunity zone fund team, which as you can imagine was not part of the original business plan.
But I think again, when we started to learn about the legislation and the opportunity zone program is aligned with so much of why we had built the business, again, longterm investments in private assets, sophisticated tax planning and structuring, again, this entrepreneurial mindset all of that lined up very well for us. And you know, also we were an RA relatively young, nimble entrepreneurial business. And so seeing an opportunity like this we were fortunate in being able to move quickly to take advantage of that. So that’s a little bit on the Cresset origin story
Jimmy: And the timing lined up very well too. It sounds like, if I got my timing correct, the opportunity zone legislation was passed right around the time the business was formed, is that right or shortly thereafter?
Nick: That’s about right. I think we officially formed in October of 2017 and the legislation would have been passed in December of that year. So really it was about the same time. And again, I think you know, I think that’s in part one of the value propositions of our business is we can be nimble and we aren’t burdened by a lot of bureaucracy, a lot of legislation or regulation. And again, it’s that entrepreneurial spirit that when we see opportunities like this that align with our core thinking and with our skillset we can move pretty quickly to take advantage of them.
Jimmy: Good. We’re wrapping up pretty soon here, Nick, our conversation today, but I wanna ask you about the current coronavirus pandemic. We’re recording this in early May of 2020 and much of the nation’s still under stay-at-home orders and the economy has been ravaged to a certain extent. A lot of projects have been put on hold. A lot of fundraising has been put on hold. A lot of investors sitting on the sidelines I would imagine. A lot of uncertainty in the markets both in the stock market and the real estate market, private equity markets as well. How has the current crisis affected what you’re doing at Cresset, and do you anticipate that it may affect Fund II at all?
Nick: It’s a good question. I wish I could tell you I knew for certain what the future looks like. I think this whole thing is far from over. And I don’t ultimately think we know what the longterm impacts will be. That being said, I do think we saw certainly a period of paralysis in the markets where I think people were digesting this, deal activity was largely on hold, fundraising was largely on hold. And I think that was driven in large part by uncertainty. That was just we didn’t know what the ultimate outcome is or even the near term outcome. And so I think there was a period of time where things were put on hold.
We have seen some activity return to the market though at a much smaller level than it was before. I do think some of the volatility over the past 8 to 12 weeks has created, believe it or not, it sounds backwards to think of it this way, but has created capital gains. I think there was a lot of selling that took place, whether that was fear or panic but maybe triggered some gains that might not have otherwise been triggered. And so I do think there are still gains in the system contrary to what you might think and there’s still value in a program that allows investors to defer payment of taxes on those capital gains.
So I do think that the thesis behind opportunity zones remains relevant. And I think as investors kind of start to return to some level of normalcy, whatever that might look like and can start to think proactively about the future, I do think there will be support for the opportunity zone program. I think we were personally we were a bit fortunate in terms of our timing. You know, we had largely raised and closed Fund I. We announced a close in late February, early March. So we had that capital effectively raised, those deals mostly tied up, financing largely secure. And that was fortunate.
Most of the…actually all of the jurisdictions where we are operating, construction is deemed an essential business. So those projects are largely under construction, with a few exceptions. Those that are under construction continue to and remain under construction. We’ve not run into issues around supply chain or labor, so work will go on. And those are large scale institutional development projects where the ultimate delivery of those buildings isn’t for another two, two and a half years. And so the point when we have to lease up those those buildings, hopefully the economy is in some level of recovery two, two and a half years out. So we were fortunate there.
And then on Fund II, we had only just announced I think March 3rd the launch of Fund II. On that fund, we’re targeting a very similar size and mandate but have until the end of December, 2021. So we have effectively another 21 months to raise that capital. We have not committed to any deals so we’re not under any time constraint to raise that capital and deploy that capital. So we have the luxury of being patient there and even potentially may be able to buy assets at a better pricing or buy land at better pricing, secure construction at lower costs than we might have otherwise been able to do. So I think we were fortunate. I think it would have been much more difficult to be in the midst of a fundraise or not have that capital deployed today because again there’s been a kind of pause in a lot of that. We were fortunate to be largely done with one and embarking on the other. And so I think that will ultimately be a benefit.
And last comment there, Jimmy is remember too, and this is an advantage of the opportunity zone program, this is a 10-year plus program. Well I think when we started on this we reminded our investors that this is 10 years, over a 10-year period, we will go through a real estate cycle, potentially multiple real estate cycles. We felt like going into this markets were already fairly top heavy. As a result we invested with very modest to low leverage on these projects, longterm financing.
And so that 10-year nature of the program gives us the ability to be patient. You know, what happens over the next 6 to 12 months may not have a huge bearing when you really stretch it over a 10 year plus horizon. Knowing that we have good financing in place, have good partners, that gives us the luxury of, again, being patient.
Jimmy: That’s a very fortunate timing there for you. So good of you, good for Cresset being the beneficiary of some fortunate timing as opposed if this had struck maybe a few months earlier, a few months later you might be in a little bit different position, but probably still in decent shape either way. Well Nick, thanks for joining me today. Thanks for the insights. I appreciate your time. Before we go, can you tell our listeners where they can go to learn more about you and Cresset?
Nick: Sure, Jimmy. So we have a website set up specifically for this fund. It is cressetdiversifiedqoz.com, all one word. And that website has obviously a profile of the firm details on the fund, information on the underlying projects. So I would encourage you to start there. And then you know, I’m happy to connect with folks who may have questions.
Jimmy: Perfect. Well for our listeners out there today, I will have show notes for this episode on the Opportunity Zones Database website and you can find those show notes at opportunitydb.com/podcast and there you’ll find links to all of the resources that Nick and I discussed on today’s show. And I’ll be sure to link to the new fund website as well. Nick, thanks again for joining me today. This has been great.
Nick: Appreciate it, Jimmy. Thanks for having us.