Real assets: real promise

Real assets secondaries have come to the fore in recent weeks. There have been large infrastructure deals, such as Ardian moving assets from its 2006-vintage AXA Infrastructure Fund II into a new vehicle backed by APG and AXA, and Pantheon’s acquisition of five European renewable and concession-based assets in a GP-led deal with European manager Marguerite.

Real estate deals may not have grabbed the headlines in the same way – fundraising figures for secondaries in the asset class show less than $500 million in final closes for the strategy as of November, according to sister publication PERE’s data. But that looks set to change, as filings show Landmark Partners has raised $2.4 billion for its latest real estate fund and $876 million through an offshore fund.

It is not the only significant dedicated pool of capital ready to be deployed into real estate secondaries – Partners Group is plotting a final close on €2 billion for its latest fund dedicated to the strategy – and dealflow looks solid too.

According to data from Landmark, $4.9 billion of real estate secondaries was under contract until 20 September, and based on the current pipeline, the total investment volume for this year is expected to exceed the $5 billion achieved last year, potentially even exceeding $6 billion.

One reason for this rise in transactions is that a secondaries trade is evolving. Beyond traditional buying of fund interests, fund recapitalisations in particular are becoming a burgeoning source of dealflow for today’s secondaries dollars.

This non-traditional secondaries trade has grown rapidly due to changing sell-side motivations brought about by the late stage in the primary investing market. The transactions are now accepted as an efficient liquidity option. There had been a stigma attached to deals like these, partly because of their nascence, but also because the vehicles in question were associated with the global financial crisis. Fund managers would find themselves with assets in a vehicle at the tail-end of its life with no other way of moving forward without a recapitalisation. With crisis-level performances, investors were less tolerant of managers repurposing straggling assets in a new vehicle.

That stigma has largely been removed. Managers are even considering recapitalisations as a way to grow their businesses, particularly in value-add or opportunistic markets with aspirations to extend offerings to core real estate. Crucially, investors keen to keep exposure to core assets that would otherwise be challenging to acquire, are more accommodating.

And so, transitioning a tail-end portfolio, rather than liquidating it, is now a more agreeable possibility for managers and investors. Of course, such transitional work requires careful execution to protect against conflicts of interest. But, as PERE noted in its special report on private real estate secondaries for December, some advisory practices are finding that aspect provides another viable business line for them.

Manager-led activity is increasing, with fund and portfolio restructurings totalling around $1.6 billion so far this year, according to Landmark. With a primary market that offers participants less space for manoeuvre, it seems likely that number will be meaningfully bigger next year.

– Thomas Duffell and Adam Le contributed to this report.