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ENGLEWOOD CLIFFS, NJ-Palisades Financial has launched the Distressed/Value-Add Fund, the locally based investment banking and advisory firm’s second investment fund. The first, Palisades Regional Investment Fund LLC, was launched in 2002 and closed this past January with $42 million in equity equally balanced between equity positions, first mortgages and mezzanine and secured corporate loans, and transactions valued at more than $500 million.

As its name strongly suggests, the newest fund is specifically targeting distressed and value-added real estate investment opportunities. The geographical focus will be on combination of the firm’s existing core markets of New Jersey, New York, Connecticut, Pennsylvania and Florida, as well as unspecified “under-the-radar markets,” according to Ira Bergstein, the firm’s CFO.

“We’ve all heard chairman [Alan] Greenspan warn investors of ‘frothy markets,’” Bergstein says. “We are taking measures to position ourselves in the event of a burst in the bubble. By implementing this fund, we are also able to provide better-managed developers with the capital to ride through any potential 12- to 24-month adjustment.

“We think that if there is a pop in the bubble, the banks will be quick to unload the highly leveraged loans,” he continues. “That’s where Palisades Financial does its best work. A 20% drop in prices causes a loan that is 75% leveraged to become 94% leveraged. That doesn’t leave margin for errors, time delays or cost overruns. And time delays are generally the largest cause of cost overruns–if you can’t sell the house, the interest and the real estate clocks continue to tick.”

The target for the new fund is to raise more than $200 million, according to Bergstein, with actual fund-raising expected to begin in Q3 or Q4 of this year. That investment money is expected to come from a combination of institutions and high-net worth individuals.

The actual amount raised “will be determined based on institutional demand,” he says. “And the fund’s investments will be consistent with Palisades’ historical philosophy–below the radar transactions where others do not see opportunity.” Founded a decade ago by William Procida, Palfi has completed more than $2 billion in transactions in 14 states.

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