There has been a rise in investor appetite for secondaries transactions as institutional investors become increasingly aware of, and prepared to utilise, the secondaries market to gain exposure to real estate.
Beyond last month’s surge in sentiment, we witnessed a market expansion over the last 18 months, both in terms of participants, available capital and the broader opportunity set. There are several strategic reasons why investors are interested in participating in secondary market transactions.
Firstly, they can provide clarity on the specific exposure to a given portfolio of assets and the ability to underwrite them. Secondly, these transactions give more immediate exposure to assets, often at a more favourable cost basis compared with competing in the direct market. Finally, investors typically benefit from a reduced J-curve as they avoid fund-level commitment fees and transaction costs common in more traditional fund investments where sponsors usually take time to build the portfolio.
The increased interest in secondaries is not just confined to institutional investors. It also reflects a broader theme for managers. We have observed the sponsor community keen to build, in the case of manager Brookfield Asset Management, or acquire, in the case of peer Ares Management, secondaries investment capabilities.
From a sponsor perspective, manager-led recapitalisations enable them to deliver multiple strategic objectives. Not only can they extend the life of an investment, giving greater runway to execute a business plan, but additional capital can be raised to expand a portfolio or enhance the asset base.
Historically, traditional dedicated secondaries funds have targeted opportunistic returns. However, real estate secondaries are now becoming prevalent across the risk spectrum. A growing number of institutional investors are prepared to participate in manager-led recapitalisations targeting lower expected returns.
As the secondaries market evolves, we expect transactions to be priced with a greater appreciation for the underlying risk-return of a particular opportunity. This trend will broaden the number of investors looking to gain exposure to real estate using these transactions and at the same time increase the quantum of available capital for the asset class.
James Jacobs is managing director and global head of real estate at Lazard. He is based in London.