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Fidelity Investments Maps Plans for 3rd High-Yield Fund

Fidelity Investments is expected to begin raising its third high-yield real estate fund by midyear. The mutual-fund giant’s Fidelity Management unit will likely solicit at least $750 million of equity for the diversified vehicle, Fidelity Real Estate Growth Fund 3, according to investors. That would translate into roughly $2.5 billion of buying power, with leverage. The $625 million predecessor fund, which closed in early 2004, is already about 75% invested.

Fidelity is once again expected to seek a 15% return by targeting a broad mix of U.S. investments — acquisitions, developments and mezzanine debt involving a range of property types. In fact, it would be one of the largest diversified real estate funds targeting only U.S. investments. Fidelity “turns over as many rocks in as many places as they can,” said one investor.

Fund 2 primarily targeted investments requiring $20 million of equity or less. As a result, it will likely end up with more than 60 investments.

Its purchases include a 108-unit apartment building in the Boston suburb of Quincy. Fidelity acquired the property, Atlantic at Marina Bay, from Equity Residential for $29.5 million, or $273,000/unit, in a partnership with local player Abrams Group. The Fidelity team plans to spend $3.5 million converting the units into condominiums, which will be marketed on average at $363,000/unit, or $39.2 million in total. The property will likely have a quick turnaround, and, if all goes as planned, produce a return in the high teens.

Fund 3 is expected to commit about a third of its equity to rental or condominium properties, whether acquisitions, developments or conversions. Another 20% will likely go toward office deals.

Fidelity originally targeted $400 million of equity for Fund 2, but found strong investor demand and raised $625 million in slightly more than a year. As a result, some players believe Fidelity could ultimately raise $800 million to $850 million for Fund 3.

Fidelity once again is raising equity predominantly from institutions. The operator itself is expected to commit $25 million.

Managing director Thomas Lavin oversees acquisitions.
Jeffrey Gandel, a vice president, heads fund raising.