LOS ANGELES—Ethika Investments has launched a second diversified value-add fund, Ethika Investment Diversified Opportunity Fund II. The fund is expected to attract $250 million in equity investments from the firm's pool of investors and from new investors, and will be used to purchase $1 billion in hotel, office and retail assets in 30 US markets.

"We have seen a lot of these opportunities continue to present themselves in the market," Austin Khan, cheif investment officer at Ethika Investments, tells GlobeSt.com. "We first see these opportunities on a macro level between the general growth trajectory of the US market versus where real estate fundamentals are, and it feels like there are a lot of growth opportunities, in particular in the value-add and opportunistic space where we are executing a business plan at the property level that includes redevelopment and renovation, operational streamlining and restructuring. Those types of investment opportunities continue to have a strong track record with respect to risk-adjusted returns. Our investors, given the performance of our previous fund, are looking to continue to place capital with us and to find opportunities for real estate investments."

The firm is finding better yeilds and value-add opporunties in the hotel, office and retail sectors than in the multifamily and industrial sectors, which have been called the "darling" of the market by some investors. "In multifamily and industrial there are certainly a lot of opportunities, but we are seeing more of what we call the build-to-core strategies, where rather than trading, you are buying existing asset classes at cap rates of 4% or 5% and people are able to build to much better yields," says Khan. "Within retail, office and the hospitality sector, we are seeing much more opportunities to take on much more significant and transformative investments that really bring about the opportunity to achieve higher levels of returns."

The fund will focus on individual investments between $25 million to $100 million in value. All of the properties will have a value-add component and will be located markets that are exhibiting growth in the country's top industries, including financial services, energy, technology, healthcare and education. "Each of those markets has certain pockets of opportunity. We focus on the top markets in the US because we want our assets to be tradable and to have liquidity," says Khan. "We want to be in markets where there are consistently flows of institutional capital so that not only can we make an attractive opportunity on a purchase but there is also there is an opportunity to exit. Within those top-tier markets, we are looking for markets that exhibit signs of employment growth, strong per capita income growth and population and migration, all macro-level elements that give us some clarity on the long term strength of those particular markets." Approximately one-third of the total transaction cost of each individual investment, either a single purchase or a portfolio, will be allocated to fund the capital improvements.

The firm's first fund, Ethika Investment Diversified Opportunity Fund I, purchased 17 properties in 13 US markets, including Los Angeles. The fund recently reached full deployment. It is expected to have a net internal rate of return of 22.3% and a 2.1x net equity multiple to investors. According to Khan, the firm targeted a returns greater than 16%, which they surpassed, and have set the same target for the second fund.