Landmark Partners is predominantly a private equity secondaries business. But with property accounting for 31.6 percent of its $19 billion of assets under management, the Connecticut-based manager is unequivocally a real estate secondaries business, too.

When Ares decided to buy it for $787 million in cash and approximately $293 million in Ares ‘operating group units’ from BrightSphere Investment Group, the Los Angeles-headquartered asset management giant would have placed great value on the growth potential of the bricks and mortar component.

This is for good reason, of course. Of Landmark’s three sectors, real estate has performed best, generating 25 percent-plus net internal rates of return from the 170 transactions it completed since inception, as of September, according to a presentation on the transaction. This is compared with 15 percent-plus from more than 490 private equity investments and 10 percent-plus from over 20 infrastructure deals.

This high-performing business, considered in private real estate circles as a bellwether for secondaries investing, has its obvious allure within a bigger organisation that has plenty of attraction points besides. Annual fee-related earnings punting up 16 percent to $492 million is one. Coupled with ostensibly few matters of overlap or conflict – Ares says there is less than 5 percent overlap among the two firm’s 1,600 combined investors, for example – the $1 billion outlay looks like a good fit.

On the conflicts front, while many private equity managers are successfully navigating operating both direct and secondary platforms, despite concerns from competitors reluctant to permit them as investors in their vehicles, inheriting a real estate secondaries business these days brings a second potential challenge to consider.

According to Landmark’s own data, of the 114 secondaries transactions, valued at $8.5 billion, closed or placed under contract in 2020, just $1 billion were categorised as traditional secondaries trades of primary fund units. The remaining $7.5 billion, or 88.2 percent, were categorised as fund or portfolio recapitalisations – a strategy that sits also among many direct private equity real estate remits.

A source familiar with the transaction tells us Landmark’s indirect secondaries real estate approach sits apart from Ares’ direct investing capabilities in the sector. Nonetheless, the complexion of recapitalisation transactions today has taken secondaries players as close to direct investing as they have ever been.

One substantiation of that is Landmark’s one-time main real estate secondaries rival, Zug-based manager Partners Group, which is now describing itself as a direct investor. CBRE Global Investors too morphed its indirect and secondaries activities into its direct, value-add platform. In affiliate title PERE’s analysis of BentallGreenOak’s purchase of Metropolitan Real Estate last month, this very potential for clashing strategies was thought to be part of Carlyle Group’s rationale for selling and an area to reconcile for its Canadian acquirers.

As far as reconciliation for Ares is concerned, an obvious first step is to ensure sturdy walls between its direct investing business and the incoming secondaries real estate operation. The firm has confirmed that intention already, stating the whole of Landmark will become a standalone fifth business vertical, alongside its $145 billion credit business and smaller private equity, real estate and ‘strategic initiatives’ verticals.

But the firm’s 1,600-strong combined investor pool – and counterparty managers on deals, too, for that matter – need to be assured an Ares-owned real estate recaps business fishes for deals in waters distinct from where its bigger, direct real estate business is trawling. The last thing Ares needs is to find two of its units competing for investments in a sector where the competition is rife enough.

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