The property sector is not really one for overnight sensations. But there is nothing quite like a stealth launch to keep everyone on their toes. Brendan Wallace and Brad Greiwe should know.
They did just that when they introduced Fifth Wall, the world’s first pure real estate tech fund, to the market in May with a $212m (£163m) raise from the off and a buy-in from some of the biggest names in the industry, including CBRE, Hines and Prologis.
The launch of the LA-based fund saw the two former Blackstone associates being hailed as pioneers – the first investors brave enough to raise a significant pot of cash earmarked for proptech and proptech alone. But Wallace and Greiwe do not really see it that way. If anything, they can’t quite believe they managed to get in before anyone else.
“We were – and still are – genuinely puzzled as to why there were no funds already focused on this category,” says Wallace.
“There are maybe 10 venture capital funds focused on education technology, which has produced a hundredth of the enterprise value of real estate tech.
“With real estate, you have this enormous industry – it is the largest in the US – at an early stage of tech adoption and no dedicated funds. We saw a huge opportunity both in terms of scale and timing.”
Speaking of timing, the stealth launch was not just for show. What makes this fund different is the fact that it is underpinned by a substantial chunk of property sector investment – around $120m (£92m) of the $212m total.
This was a key part of Wallace and Greiwe’s strategy as they looked to mitigate risk by getting their end users on board from the outset. They spent nearly a year securing support from the biggest real estate players before approaching financial institutions to raise the rest.
So an overnight sensation it was not. Careful and meticulous structuring was required to create a model solid enough to guarantee that any investment will double or triple that company’s revenue within 18 months.
Here, Wallace and Greiwe explain how they will be able to deliver on such a bold promise and reveal their future plans in the US and beyond as they set their sights on Europe.
Uncharted territory
The Fifth Wall co-founders might have found it odd that there was no other pure proptech VC fund in existence when they decided to launch. But they do understand why this might have been the case.
“The reason is probably two-fold,” says Wallace. “First, there is the fact that there just aren’t a lot of people from the real estate industry who work in venture capital. I am not sure why that is the case but the two sectors just don’t really overlap.
“The second, which is core to our fund strategy, is that real estate tech has a unique risk profile.
“The industry is such a late adopter, and because what exists today is so low-tech, most ideas in this space are good ideas. By that, I mean you don’t face the same big questions that you would in most other kinds of venture investing. Like ‘does it work? ‘Can you build it?’ ‘Is it better than the status quo?’ In most cases in this sector, the answer is yes. So it is a relatively low technical risk. But what you then have, on the other hand, is an enormous go-to-market and distribution risk.”
And therein lies the problem. The issue that has, most likely, put off many an investor or potential pioneering fund from putting all their eggs in the proptech basket. How do you guarantee uptake in a market so slow to adopt technological advances?
“You could have $100m and the best product ever,” says Wallace. “But if CBRE does not adopt you, you are not going to be successful.”
This is where he and Greiwe hope that Fifth Wall’s set-up will come into its own: “Our strategy was simple,” he says. “We realised that if we could go out and raise capital from the biggest buyers of real estate technology then we would know what they would be likely to adopt and who they would be likely to partner with.
“We would therefore be able to rapidly accelerate the growth of our portfolio companies with that visibility and would have the ability to view the entire market from the perspective of what the incumbents want rather than speculate on what is going to be adopted.”
The Fifth Wall fund property backers
- CBRE – the US’s largest commercial agent
- Prologis – the largest industrial company
- Lennar – the second-biggest housebuilder
- Hines – the largest office developer
- Macerich – the third-largest mall owner
- Host Hotels – the largest hotel owner
- Equity Residential – the largest apartment owner
The pair set about breaking the industry down into its major “food groups”; office, industrial, hospitality and multi-family (better known as PRS in the UK) with the aim of raising capital from one of the biggest, if not the biggest, in each of those categories.
The fact neither of them were coming to the real estate industry cold helped considerably.
Wallace started his career in real estate investment banking at Goldman Sachs before moving into real estate private equity at Blackstone. Greiwe started off at UBS before working in real estate private equity for Tishman Speyer and Starwood Capital in San Francisco.
“Having connections to those executive teams was the big differentiator we had,” says Wallace.
The first two companies to sign up were CBRE and Prologis, followed by Lennar, the US’s second biggest housebuilder. Hines, the US’s biggest office developer, followed suit and before too long the real estate part of the fund had been raised.
And Wallace adds that with the great and the good of the property sector behind them, raising the remainder of the fund happened quite fast.
“Once we had that strategic capital, the next $100m was raised very quickly. We were oversubscribed within months as the financial LPs, the endowments, the pensions could all see the advantage of the industry backing.”
But how easy was it to get that industry backing? To get major property companies to part with massive chunks of cash and effectively asking them to take a punt on a fund with a profile so unique that, as yet, no one else had dared attempt a launch?
“We obviously chose partners who realised that technology was going to be a major driving factor of their business strategy moving forward,” says Greiwe.
“But I would say that for the conversations we had with our anchors, we had many more with other real estate owners and operators who viewed things differently and who said: ‘Hey, you know what? This is just not what we do, we’re real estate guys.’ So there was definitely evidence of a more head-in-the-sand approach.
“The corporates we brought to the table were therefore really quite curated. They are the real estate companies that are well-positioned with internal commitment and wherewithal to invest in technology.”
As for the size of the fund, the pair agree it is a hefty sum, but are quick to point out that, in terms of the sector at large, it barely makes a dent.
“About $3bn (£2.3bn) went into just real estate tech last year,” says Greiwe. “That does not even include retail tech, hospitality tech, construction tech. If you added all those categories together, you are probably talking about somewhere between a $5bn-$10bn space in terms of venture capital invested per year. So Fifth Wall, while we are the largest in our category, represents a very small percentage of the total capital invested in this sector.
“As you can imagine, while it seems like an amazing opportunity to say: ‘Hey, I am investing in a company knowing that its revenue is going to double or triple in the very near term’, there is a lot of hard work that goes into structuring and engineering those deals,” adds Wallace. “So the short answer is yes, we think it is a large fund, but it needed to be.”
Eyes on the prize
Over a year on from those first negotiations, all eyes are now on Fifth Wall to see what it will back.
Around $80m has already been invested in companies, including software leasing platform VTS. As for what is next, anything goes.
“Based on where we are in the tech life cycle, I think everything is on the table right now,” says Greiwe.
“Anything from workplace as a service, which can encompass companies like WeWork, short-term rental companies, energy efficiency is obviously huge. And I think there are definitely opportunities in and around capital markets. Real estate capital markets are some of the largest in the world, so the fintech companies that are tackling that space are really compelling on the lending and insurance sides.”
As for the split between residential and commercial, Wallace says: “We look at both. I don’t think we have a specific target in mind. I would say, to date, our breakdown between commercial and residential has been about 50/50, not by design, but that is just the way it has played out as we have invested.
“But there really are huge opportunities in commercial,” he adds. “The dynamics of having these large corporates is quite obvious. When you have tens of millions of square feet that you can experiment on in our corporate LPs’ portfolios it makes it a lot easier to scale businesses, like VTS, for example.”
Where to now?
The next step will eventually be to launch another, potentially even bigger, fund and there is growing interest in investing outside the US.
“We are looking at a couple of European technology companies right now,” says Wallace. “There is probably more innovation in the US as it relates to real estate tech, but we are actually seeing a lot of really interesting opportunities abroad, both from Europe and Asia.
“In terms of what that means for the Fifth Wall franchise going forward, maybe that means we launch a separate fund focused on European corporate LPs and European companies. Maybe it means we do it in the same fund.
He adds: “I don’t think we have a strong view on that yet but from an investment perspective and from a capital-raising perspective, probably about a quarter of our existing capital is international LPs, some of which have quite a bit of real estate.
“I expect a decent percentage, probably somewhere between 15-20%, of our first fund will be allocated to international companies, probably primarily in Europe.”
Greiwe adds: “That interest and exposure will only grow over time. Obviously, the anchors in our LP base today have significant international real estate exposure, so I think we would be doing ourselves a disservice if we were only focused on innovating in and around the US because we need to provide technology solutions that have applicability across the globe.
“So we are definitely interested in what is going on in Europe. And I think London is the most important city, at least in terms of providing an ability for technology companies, especially technology companies in the US, to have access to the European market.
“We have already seen that happen with one of our portfolio companies, VTS, which has had a significant amount of success opening an office and operating it out of London.”
Just over three months ago, no one had even heard of Fifth Wall. Now there are plans for a second fund, international expansion and, of course, that all-important guarantee cementing the entire fund – a double or tripling of revenue within 18 months on every company it invests in.
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