A year ago, GP-leds involving real estate assets were building up a head of steam and their rise seemed inexorable. Manager-led secondaries in the asset class had grown by 38 percent on an annualised basis in the five years to that point as perceptions shifted from a view of GP-leds as being reserved for failing assets, to a developing appreciation that such transactions were also useful for managers seeking liquidity and fresh capital or attracting strategic investors.
Perceptions are not all that have shifted. As economic conditions have changed – not least with a series of sharp central bank interest rate hikes fuelled by accelerating inflation – buyers are increasingly looking at LP acquisitions. This goes a long way to explaining the story of 2022. While the year set a record for real estate secondaries transaction volume – $12.4 billion, up almost $2 billion from 2021’s previous record, according to Ares Management – a dig into the detail shows a fast start to the year followed by a deceleration in the rate of transactions in Q3 2022, and then a sharp application of the brakes in Q4.
Speaking on a panel moderated by Secondaries Investor at affiliate title PERE’s Europe Summit, which was held in London this week, James Jacobs, managing director at Lazard, recalled a deal he and fellow panellist Josh Cleveland, who is EMEA head for real estate at StepStone, worked on almost two decades ago while at different firms. At the time, it was the largest-ever real estate secondaries transaction, at several hundred million pounds. Pitted against Blackstone’s €21 billion recapitalisation of Mileway last year, however, it’s clear the real estate secondaries market has come a long way.
The private equity secondaries market has a turnover rate of around 2 or 3 percent, according to advisers’ estimates. Should the real estate secondaries market get close to that, it could become much larger than its current size. Speaking on the same panel, Paul Parker, a partner in the Ares Secondaries Group, agreed that the record amount clocked in 2022 was a drop in the ocean. According to Parker, there is around $900 billion in net asset value held by global institutional investors in private real estate funds across value-add and opportunistic strategies. About $220 billion of that is held in funds that are eight years old, or older.
“You’ve got a lot of funds which are approaching that point where they’re going to have to get extensions; you’ve got managers wrestling with LPs that are getting somewhat fatigued, they want their money back, they thought that was the business plan… and so they’re looking for that right solution,” Parker said.
There appears to be more opportunities than buyers have capital for. Alexis Prevot, a managing director at Brookfield Asset Management, said on the panel that this is the first time in his career where buyers aren’t having to fight each other in broker-led processes simply to pay the highest price to win a deal.
“These days you go out and you negotiate, and you end up with a clear view… of the value of what you’re buying,” Prevot said.
With interest rates having doubled or tripled, depending on when managers borrowed capital, and around $2.5 trillion in floating rate debt coming due over the next five years, gap financing will be needed, Nancy Lashine, founder of advisory firm Park Madison Partners, told Secondaries Investor on the side lines of the event. This will be a huge source of recap opportunities as GPs are figuring out whether they want to take advantage of an opportunity to salvage an investment or refinance the debt; and whether they need gap equity or alternatively give investors options at liquidity, reinvestment or both.
Stay tuned for PERE’s Secondaries & Recapitalisations Report on Secondaries Investor next week.