U.S. Funding Models Don’t Always Translate to Africa

May 27, 2025

sam zell sitting on leather sofa smiling hands clasped

EXECUTIVE SUMMARY

Real estate private equity emerged surprisingly late, with the first fund, Zell-Merrill, launched in 1988. Before that, generous bank lending meant developers rarely needed outside equity. But after the 1980s debt crisis and 1986 U.S. tax reform, capital needs shifted. Sam Zell pioneered a new model: acquiring distressed properties using investor capital, not bank debt. The success of Zell, followed by Goldman Sachs and others, reshaped real estate investing. This shift aligned incentives better and set the foundation for today’s multi-trillion-dollar real estate private equity industry.

Author:

John P. Causey IV

U.S. Funding Models Don’t Always Translate to Africa

Modern private equity gained momentum in the 1980s through leveraged buyouts. Yet it wasn’t until 1988 that the first real estate-focused private equity fund was launched, surprisingly late given real estate’s large deal sizes and typically stable cash flows.

Real estate didn’t attract private equity capital earlier not because investors lacked interest, but because developers didn’t need it. Commercial banks provided generous, non-recourse loans with loan-to-value (LTV) ratios approaching 100%, often at low cost. There was little incentive to take on equity partners when debt was so accessible.

This changed in the mid-1980s. A surge in interest rates during the late 1970s and early 1980s led to widespread distress in real estate markets. Banks tightened lending standards, and LTVs dropped to 50%–70% by the early 1990s. Developers suddenly needed equity, but the sources of that equity had dried up.

Initially, developers filled the gap by syndicating tax losses. U.S. tax law at the time allowed 15-year depreciation on real property, enabling early-paper losses that could be sold to high-income professionals as tax shields. But the Tax Reform Act of 1986 extended depreciation timelines and eliminated many of those benefits. Real estate values fell, and equity became scarce.

Zell-Merrill Fund

Sam Zell is credited with starting the first private equity fund focused on real estate investments. In 1988, Sam Zell launched the Zell-Merrill Fund, backed by Merrill Lynch. Initial fundraising was slow, just $10 million in May, but quickly accelerated to $408 million by June 30. The fund closed with $490 million, including a $40 million GP commitment (8%).

Fundraising for the fund was brutal, but through perseverance the fund’s commitments of $10 million in May, mushroomed to $408 million by June 30, 1988. The fund’s final close was $490 million. The sponsors contributed $40 million, representing around a 10% GP commitment.

The fund focused on distressed assets, often injecting capital into failing projects just long enough to see the bank loan repaid, after which the fund would take control of the property. Zell also bought prime assets held by the U.S. government following the collapse of savings and loan institutions, foreshadowing strategies later used during the Global Financial Crisis.

The first fund’s returns were modest, but follow-on funds performed better. Three additional Zell-Merrill funds raised $410 million, $680 million, and $688 million, respectively. The combined platform eventually became Equity Office, sold to Blackstone in 2007 for $39 billion, then the largest leveraged buyout in history.

Institutional Capital Arrives

Goldman Sachs followed Zell’s lead, shifting from advisory to direct investment. Its first Whitehall Fund closed in 1991 with $166 million. Whitehall II, launched in 1992, raised $790 million. Over 13 funds, the Whitehall series eventually raised $22 billion, concluding in 2019.

Other early movers included Apollo, Angelo Gordon, Blackstone, Cerberus, Lehman Brothers, Morgan Stanley, AEW, Colony, JE Roberts, Lone Star, Lubert-Adler, O’Connor, Starwood, Walton Street, and Westbrook. In 1992, Merrill Lynch took Kimco Realty public, now the largest open-air, grocery-anchored REIT in the U.S.

Initially, real estate private equity funds were largely backed by family offices and wealthy individuals. Institutional capital only followed after recovering from the real estate downturn of the late 1980s and early 1990s.

Private Equity was an Improvement

Before real estate private equity funds, institutional investors hired specialized real estate managers to invest their capital through separate accounts and commingled funds. Fees were based on percentages of NAVs, and commissions were paid on concluded transaction. A strong financial incentive existed to transact frequently and to report the highest possible property value as possible.

The private equity model was an improvement over the status quo because it better aligned the interests of the investor and outside manager. This was achieved in a few ways including the practice of GPs committing 2% - 25% of the total capital raised. By having skin in the game, the investors believed the managers to be more aligned to their interests. Management fees were based on committed capital, not NAVs. This removed the incentive to overstate property values in order to increase management fees. Lastly, commissions were abolished, and in their place a performance fee (i.e., carried interest) which only became payable after the investors had achieved a target return of capital and profits (i.e., hurdle rate).

VANTAGE'S TAKE

Africa’s real estate investment space often adopts U.S. capital structures, but copying models built for different conditions can misfire. In the U.S., real estate private equity developed when cheap debt disappeared and alignment between capital and operator became essential. GP commitments, carry, and fee structures were solutions to specific problems. In Africa, where markets are still forming, these frameworks may not always apply. Instead of imposing imported models, fund managers should let local needs and realities shape how capital is raised and structured.