Secondaries becoming ‘accepted tool’ for private real estate

The private real estate secondaries market is on the rise, according to panellists at a forum held by affiliate publication Private Equity Real Estate.

Landmark Partners revealed in January that the sector had experienced $3.7 billion in activity last year, up from $2.6 billion the previous year – and the increase is likely to continue.

“There are still only a couple of dedicated buyers in the space but it’s starting to follow the trends established on the private equity side of the business, which is a much more mature market,” said Robert Dombi, partner at Landmark, the private equity and real estate advisory and investment company.

The private equity secondaries market, in comparison, is about $25 billion in size with more than 40 competitors, noted Dombi. “The real estate secondary transaction as a method for portfolio management is becoming more accepted and more out in the open, as people are becoming more educated and aware of it.”

Dombi’s fellow panellists agreed, including Tim Walsh, current president and chief operating officer at Gaw Capital Partners USA. As former chief investment officer leading the New Jersey Division of Investment when the pension made its big secondaries deal with NorthStar Realty Finance last year, Walsh was aware of being one of the few players. “I still don’t understand today why more public funds and institutions are afraid to do it,” he said.

More investors are beginning to take a proactive view of the secondaries market, according to Ken Wisdom, managing director and head of real estate at Portfolio Advisors. He said that, especially with investments from 2005 to 2007 on their books, investors are seeing that it might be more prudent to sell in order to create liquidity and redeploy that capital in higher returning investments.

Financial services firms are also looking to secondaries in a reactive way, due to impending regulations such as the Volcker rule, which limits banks’ exposure to private equity. “With the Volcker rule, there’s a lot of pressure to manage risk, and US and European institutions are feeling the pressure to sell,” said Wisdom.

Dombi noted that changes in CIOs or consultants at institutions are also signals of possible secondaries activity. The new people often want to modify the strategy of the plan and are not tied to the decisions of their predecessors, especially as they do not necessarily feel the same stigma when selling an investment authorised by someone else. “As the market matures, the stigma attached to selling private real estate secondaries assets is fading away and it’s becoming a more accepted tool,” he said.

Mark Canavan, senior portfolio manager of real assets at the New Mexico Educational Retirement Board, provided an LP’s point of view on the panel. He added that public pension plans might be more cautious about selling because they want to hold out for the possibility of a positive shift in the market by the time the fund is realised. “I think one reason why more people don’t do it is because, if I’m holding that dog, psychologically it’s not a loss until I realise it,” he said.

Reporting by Katherine Bucaccio