Key Takeaways
- • Savanna Investment Management has written off all remaining investments in Savanna Real Estate Fund III to zero, eliminating total capital for limited partners including Kansas PERS ($40 million committed in 2013), Los Angeles Fire and Police Pensions ($50 million), and Teacher Retirement System of Texas ($25 million).
- • Fund III, which raised $443 million as a value-added office building fund focused on New York City, has failed to deliver returns despite projecting an 11.5% unleveraged internal rate of return and 65% maximum leverage at inception.
- • Kansas PERS has removed Savanna as a fund manager after placing it on probation multiple times, citing zero residual value in the pension fund's Fund III investment.
- • As of October 2023, Fund III held seven properties with restructured loans on three assets and ongoing restructuring negotiations for the remaining three, indicating severe distress across the portfolio.
Summary
Savanna Investment Management has completely written down all remaining investor capital in its third US real estate fund, a significant loss for institutional investors in what was positioned as a stable, value-added office investment strategy. Kansas Public Employees Retirement System (PERS), which committed $40 million to the fund in 2013, disclosed the total loss in a meeting document that formalized the write-off to zero. The fund also counted major pension fund investors among its limited partners: Los Angeles Fire and Police Pensions with a $50 million commitment and Teacher Retirement System of Texas with $25 million deployed.
Savanna Real Estate Fund III, which closed with $443 million in total capital raised, targeted New York City office properties with a projected strategy employing up to 65% leverage and an unleveraged internal rate of return target of approximately 11.5%. The fund's collapse represents a dramatic departure from these initial projections and highlights the challenges facing office-focused real estate strategies in a structural downturn for that sector.
The deterioration of Fund III was evident in the months preceding the total write-off. In October 2023, Kansas PERS disclosed that seven properties remained in the fund's portfolio, with management having restructured loans on three properties and actively negotiating restructurings for the remaining three. This restructuring activity signaled mounting financial stress across the asset base. Kansas PERS had grown increasingly concerned about Savanna's performance, placing the fund manager on probation on multiple occasions before ultimately removing it from its manager roster due to the absence of residual value in the pension fund's investment.
The total loss represents a meaningful setback for Kansas PERS' real estate allocation strategy and compounds broader challenges within the office real estate sector, particularly in gateway markets like New York City where pandemic-driven demand shifts and rising interest rates have pressured valuations and restructuring of debt. Savanna Investment Management did not respond to requests for comment on the write-off.
Savanna Real Estate Fund III, which closed with $443 million in total capital raised, targeted New York City office properties with a projected strategy employing up to 65% leverage and an unleveraged internal rate of return target of approximately 11.5%. The fund's collapse represents a dramatic departure from these initial projections and highlights the challenges facing office-focused real estate strategies in a structural downturn for that sector.
The deterioration of Fund III was evident in the months preceding the total write-off. In October 2023, Kansas PERS disclosed that seven properties remained in the fund's portfolio, with management having restructured loans on three properties and actively negotiating restructurings for the remaining three. This restructuring activity signaled mounting financial stress across the asset base. Kansas PERS had grown increasingly concerned about Savanna's performance, placing the fund manager on probation on multiple occasions before ultimately removing it from its manager roster due to the absence of residual value in the pension fund's investment.
The total loss represents a meaningful setback for Kansas PERS' real estate allocation strategy and compounds broader challenges within the office real estate sector, particularly in gateway markets like New York City where pandemic-driven demand shifts and rising interest rates have pressured valuations and restructuring of debt. Savanna Investment Management did not respond to requests for comment on the write-off.
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