How do you see your background in capital raising helping on the deal sourcing activities at Multiplicity?
I feel my background in capital raising lends itself well to deal sourcing as it gives another perspective to identifying and evaluating opportunities. When you are on the road as a capital raiser meeting with hundreds of LPs a year, you learn a lot about how investor groups, down to each individual investor, think. From this information, you are able to identify trends in the making as you have a front row seat in not only seeing how these trends are evolving but also what catalysts trigger one investor over another to react and make changes to their portfolios at any given time.
Having learned this “psychology of investing”, I believe, will help with thinking outside of the box and identifying investment opportunities. In addition, my commercial real estate brokerage background in leasing and investment sales is an advantage in understanding assets and markets as it gives me an even more diverse lens for evaluating deals. Lastly, I would think that having a broad and diverse global network that can be leveraged for deal sourcing should be an added plus.
What are the most interesting areas of the real estate secondaries market to you?
The real estate secondaries market, although much smaller than the buyout market, has been growing rapidly over the past few years. The interest from investors that historically did not invest in real estate has contributed to funds growing much larger in AUM, hence the highly competitive market for the large deals.
We have carved out a niche in investing in smaller deals as we believe that it is an under-represented space within the real estate secondaries market. We are also particularly interested in more complex transactions that most buyers would prefer to steer clear of.
Can you walk us through Multiplicity’s role in the market and its real estate secondaries offering?
We are deploying capital for our second fund which invests in all private markets strategies – real estate, infrastructure, private debt, private equity – and all geographies, including emerging markets, with a target on deals valued up to $2 million per single interest.
Our focus is on providing liquidity for out-of-favour deals, often found in underperforming funds or tail-end situations where there is hardly any upside to NAV. According to Landmark Partners, the NAV held in pre-2009 funds that have expired or are close to legal expiration stands at $150 billion. For post-2009 funds that NAV is approximately $250 billion for funds that have reached their peak. For this reason, we believe there will be more and more opportunities coming to the market and are particularly keen on increasing our exposure to real estate investments of this type.
What types of deals will you be looking to do in the smaller, niche private markets space?
We are looking at smaller deals, whether it be from a tail-end fund or providing liquidity to investors that may need to make changes to their portfolio for reasons that can range from regulatory or liquidity requirements, portfolio management, over-commitment or reduction in the number of their GP relationships. Our willingness to invest in all geographies, such as emerging markets, is also another area for deals that are attractive to us.
What is the opportunity like for RE secondaries deals in underperforming funds? How can you find value in such transactions and how will Multiplicity make such deals work?
It’s key to understand that mature funds that have underperformed will on average recover substantially less than NAV. If you look at Preqin’s dataset of eight- to nine-year-old real estate funds, you will find that top-quartile funds have returned on average 143 percent of their NAVs, while the typical bottom-quartile fund of that age has only recovered 74 percent. This means sellers who sell a top fund at NAV leave $43 on the table, compared with only $24 if they sell a bottom-quartile fund at 50 percent discount. That said, it’s clear that bottom-quartile funds will always trade at a substantial discount, but can be attractive for both sellers and buyers.
For particularly high-risk transactions, often in emerging markets funds, we usually suggest incorporating an earn-out feature. Often this will bridge any differences in price expectations and results in a win-win for both the seller and buyer.
Although we are not set up to do secondary direct deals in real estate, we are a buyer for liquidating SPVs with cash that is blocked as reserves for potential tax liabilities, litigation or reps, and warranties made in connection with asset sales.
Melissa Ackermann is director at Zurich-based Multiplicity Partners. She has over 17 years’ experience in the alternative investment industry with a focus on real estate, business development and cross border distribution. Prior to joining Multiplicity in June, Ackermann was at Deer Isle Capital where she raised capital for alternative investments. She has held capital advisory roles at MetLife Investment Management and Accord Group.