This week, StepStone Group held the final close on a $1.4 billion real estate secondaries fund. StepStone Real Estate Partners IV is focused on “special situations secondaries and recapitalisations”, a strategy it adopted after the global financial crisis and one it is confident will reap rewards today.
According to the head of StepStone Real Estate Partners, Jeff Giller, a typical crisis-era deal might involve a strong portfolio of assets that has become over-leveraged, perhaps after being reappraised by a creditor. StepStone will invest on a preferred equity basis, allowing the GP to resolve any issues with the bank, reposition the assets for the new environment or make opportunistic acquisitions.
“The economy is still being propped up by government support and consequently managers haven’t written down their assets,” Giller says. “We think the shoe is absolutely going to drop but we’ll be patient to ensure we address the market at the right time… What you don’t want to do is get it wrong.”
The question of timing has lingered for secondaries buyers across asset classes since the crisis sprung up in March. Back then, many believed that a fall in public markets would cause limited partners to be over-exposed to alternatives, and that this would force a hasty sell-off at a healthy discount. However, government intervention helped prop up the public markets, even as fundamentals deteriorated, and the sell-off didn’t happen.
“During a good portion of H1 we saw the dialogues that we were having with sellers disrupted by very rapid appreciation of public market valuations,” Partners Group’s co-chief executive David Layton said in early September.
Giller is not alone in his belief that the effects of the crisis will feed through, albeit a steady, persistent trickle rather than a wave. Secondaries Investor is aware of one endowment that is exploring a portfolio sale to help meet its liquidity needs. In the view of one London-based fund manager, it is unlikely to be the only one.
“Many large academic institutions, particularly in the US, are having huge problems right now,” said the fund manager. “There’s no college football, no college basketball – you are starting to see cashflow requirements drive asset sales in a way we haven’t seen yet.”
That there has been no liquidity crisis yet has meant that relatively few GPs have had to seek out rescue financing in the form of preferred equity. But the damage to portfolios caused by the virus is creating a need for liquidity in other areas.
“You were planning to raise a fund in Q1 or Q2 and you couldn’t, you come to September and you really need to launch,” says one private funds managing director. “But you have two portfolio companies that have been hit hard by covid. Three or four large LPs are, for whatever reason, not engaging. There is a requirement for bridging capital which I think will become stronger and stronger in 2021.”
Although there was no fire sale in the spring, a stressed and distressed opportunity still exists – for those that time it right.
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