Morgan, O'Connor set up a fund to buy distressed real estate.

J.P. Morgan & Co. has teamed up with O'Connor Group to establish a fund that will invest as much as $500 million in distressed commercial real estate, according to market sources.

The venture between Morgan and O'Connor, a New York-based real estate firm, is called the Argo Partnership.

The Argo fund is expected to close in the fourth quarter of this year or first quarter of 1994. So far, it has attracted investor interest of more than $250 million, said sources. That amount is expected to reach $500 million by closing, a source said.

The Partners' Roles

Morgan brings to the partnership its financial acumen and access to insurers and financial institutions that are potential sellers of distressed assets.

O'Connor Group will be asset manager for properties the partnership buys. Officials at O'Connor and Morgan declined to comment.

Morgan and O'Connor join a fast-growing list of new investor groups looking for distressed commercial properties and loans. For example, CRI Inc. of Rockville, Md., last month formed a venture to buy $400 million of performing and distressed hotel loans.

And international investor George Soros recently completed his first purchase of $634 million of distressed assets from the Travelers Corp. through his Quantum Realty Fund vehicle.

Bankers Trust, Too

Morgan and Bankers Trust New York Corp. are thought to be the only two bank companies currently pursuing the purchase of distressed real estate.

Investors have been attracted by the potential returns anticipated from the billions of dollars of real estate loans that have been sharply written down in value by banks and insurers. Lenders took the writedowns after the speculative bubble they helped create in the 1980s burst.

With $500 million available for investment, Argo would be able to bid for large portfolios of distressed loans. Because buyers of distressed assets can typically arrange debt financing for a part of the purchase price, Argo could by portfolios with market values of up to $750 million, said a source.

Since some major portfolio sales have been made at 50% to 60% of face value or less, Argo could, therefore, buy portfolios with a face value of up to $1.5 billion. Argo will likely shop for portfolios with a face value of $150 million to $500 million, said a source.

Shorter Time Horizon

The fund will use a "venture capital" type of investment strategy, envisioning liquidation of its holdings within three to five years, said a source.

This is a shorter time frame than the typical 10- to 12-year holding period for traditional real estate investors, he said. Investors in Argo are being offered annual returns "in excess of 25%," a source said.

Morgan's investment will equal 8% of the amount raised from private investors, and O'Connor will invest 2%, said the source.

O'Connor and Morgan apparently will not get any annual fees from investors beyond those covering the funds operating expenses.

Insurer Relationships

Although banks have been writing down the value of nonperforming commercial real estate loans and selling them for more than a year, there's more in the pipeline for investors. Insurance companies such as Travelers have only recently begun to sell their written-down assets.

Morgan has strong relationships with major insurers, including the Prudential Insurance Co. of America and John Hancock Mutual Life Insurance Co., for whom it has led syndicated loans in the past.

Morgan is betting it can use these relationships to its advantage when shopping for distressed portfolios.New Guy on the BlockFund name Argo PartnershipMajor J.P. Morgan & Co.,partners O'Connor GroupFund size $250 million -- $500 millionObjective Invest in distressed real estateSource: American Banker

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