Institutional appetite from real estate investors to allocate capital to manager-led secondary transactions increased in April, building on the high levels of investment seen in this sector last year.
According to US-based manager Landmark Partners, real estate secondary transaction volume was more than $10 billion in 2021, having doubled over the previous five years. To match these impressive volumes, both investors and sponsors have become better educated on the merits of manager-led secondary deals which, in turn, creates greater interest in this field.
Two factors have resulted in the growth of transactions in this area. Firstly, there has been an increase in the amount of capital raised by the dedicated secondary players active in the market, pursuing these types of transactions. Secondly, the sponsor community has recognised this sector provides a useful tool for portfolio management: instead of exiting via the direct market, they can provide some form of liquidity, full or partial, to their third-party investors.
As the industry evolves, more sponsors are likely to turn to the secondary market as an alternative to a direct sale, leading to an increasing number of recapitalisations. Sponsors are exploring the secondary market to meet growth objectives, unlock value within their portfolio or to solve a capital constraint. The potential triggers for manager-led secondary transactions are multiple and include portfolio construction limits, delayed business plans and additional capital needs to restabilise assets impacted by the pandemic.
The increased interest from sponsors is also mirrored by that of institutional investors, which are becoming better educated on the benefits of investing in secondaries. One significant advantage to investors is the access and exposure to a pre-specified portfolio with greater visibility, often through the ‘J-curve.’ In addition, there is greater diversification upon investment as the assets already exist with a shorter duration to exit. Investors are able to invest on a more favorable cost basis than through the direct market, while avoiding frictional fees, costs and taxes.
Given the multiple benefits from both a sponsor and an investor perspective it is likely we will see further increases in transaction volumes over the coming years.
– James Jacobs is head of real estate for Lazard’s private capital advisory group.