Shifting gears in the RE secondaries market

Managers of real estate secondaries funds are creating their own niches to put to work the huge sums of dry powder they collected in recent years.

Capital raised for dedicated real estate secondaries strategies in 2017 was looking underwhelming until late into December, when Secondaries Investor revealed that Landmark Partners had raised at least $2.4 billion for its latest fund. This helped ignite what had been an underwhelming year; less than $500 million had been raised by November.

This approximate $3 billion of capital is in addition to $5.34 billion of capital that real estate secondaries managers raised in 2015 and 2016.

It is a relatively small pool of investment managers garnering this substantial investor support. Leading the way are firms including Landmark Partners, Madison International, Partners Group, Metropolitan Real Estate and Strategic Partners, which have each raised, or targeted capital raises in excess of $1 billion in recent years.

“What we have seen is that some of the larger players on the private equity side have not made the transition yet into this space, so it really is the same players who remain. But the fund sizes are getting bigger,” says Sarah Schwarzschild, managing director at Metropolitan Real Estate. “There are groups who play opportunistically in the space or are interested in the large portfolios, but from a dedicated funds standpoint, it really is a small group of players.”


Total exposure size of
‘mega’ endowment transaction
closed this year


Approximate transaction volume
through September 30, 2017 completed
by dedicated secondaries buyers

Yet, with billions of dollars raised by these few groups needing to be deployed into real estate secondaries in the next few years the managers themselves remain unfazed by the level of competition.

“The market is increasingly getting specialised, so the focal points of asset managers are different. Not everybody pursues the very same strategy in detail. Everybody calls it secondaries, but in the implementation of it there are lots of nuances,” says Stefan Lempen, co-head private real estate secondaries at Partners Group.

Lempen describes how Partners has shifted its focus away from traditional secondaries transactions – buying interests in primary real estate funds from institutional investors – towards providing recapitalisations to mature funds in need of liquidation.

“We are slightly differentiating ourselves, or at least trying hard to do so, by moving away from buying fund interests. There is a bifurcation in the market with some groups more focused on the way we do business, and others on a more traditional approach to secondaries. Some investors prefer our approach and others prefer the more traditional approach,” says Lempen.

Others in the market are differentiating themselves in different ways. Dimme Lucassen, senior investment manager at Aberdeen Asset Managers, says his firm is focusing on a specific risk-return profile which is less competitive.

“The way we view secondaries is more as a low risk way to get to real estate, so instead of going high up the risk curve we stay where we are and benefit from the risk reducing characteristics. And because we are not chasing the high returns there is less competition in the area we are in as the largest secondaries players have high return targets,” says Lucassen. “We really like the risk-reducing characteristics and that is what we focus on for our investors. If they want 16 percent net return, they’ll need to go up the risk curve and there are other parties targeting this space. Our peers are very successful at raising capital so there must be a lot of investors out there looking for that higher octane return.”

Schwarzschild says Metropolitan focuses more on traditional secondaries, but with its own slant on the market. “We have larger competitors who do larger deals. But we have carved out an area of smaller deal sizes with vertically integrated managers. There is a different focus between the players across the market.”

“We think traditional secondaries are inefficient because there is still asymmetric information out there, so from a buyer’s perspective, if we have more data than other potential buyers, we have an edge.”

Several factors attract investors to all types of real estate secondaries transactions, Lempen says: “You buy into visible cashflows with a shorter duration than a traditional investment cycle; you typically buy at a lower market valuation and you typically buy at a lower cost than traditional property investing.”

For this reason, Lempen says, capital formerly allocated to fixed income products is now being redirected towards real estate secondaries.

“The net returns available today are probably between 12-14 percent IRR, which if you look at what fixed income or equity provides it is good. It’s a good substitute for fixed income and quite a lot of the capital we attract is being reallocated from fixed income. There is clearly a spill-over.”

Lucassen adds he was somewhat surprised to see non-traditional real estate investors also going directly after secondaries positions.


Most active sellers by dollar volume



Asset Managers


Pension Funds




“We have seen fixed income investors come in to direct real estate. What I hadn’t seen before was these investors coming in to real estate secondaries to get access to real estate or cash on the balance sheets of these funds. This is not something that happens frequently or makes up a large part of the market, but I was quite surprised to see a number of bidders who are not traditional real estate investors in a specific secondaries transaction.”

Going with the flow

This increased interest from non-traditional real estate investors in secondaries had led some investors to question whether the supply and demand balance would tilt disproportionately towards demand.

“In terms of dealflow, with secondaries it is always all over the place and it is not a continuous flow in the normal sense,” says Lucassen. “What we see is that numbers will be quite high for 2017, so it hasn’t come off, which was a fear for some investors – that supply would dry up – but it is not the case.”

According to data from Landmark Partners, $4.9 billion of volume is under contract through September 20, 2017, and based on the current pipeline, the total volume for 2017 is expected to exceed the $5 billion achieved in 2016, potentially even exceeding $6 billion.

Lucassen says that increasing volatility in markets will create more dealflow as investors shift their portfolio positions to mitigate new risks. He adds that as the overall size of the real estate fund manager universe grows across the globe, that will lead to more opportunities.

The other component adding to dealflow is the bulk of funds that are coming to the end of their lives.

“The 2006 and 2007 funds are not all ready to be wound down. Some have investors which will want to continue, so GPs are looking for solutions,” says Lucassen.

And according to Landmark data, pre-2009, the net asset value held in funds that have expired or are close to legal expiration stands at $158 billion, and post-2009, that NAV amounts to approximately $250 billion in post-peak funds that Landmark describes as more “seasoned”.

All the while, in the first three quarters of 2017, Partners Group’s investment team screened more than $35 billion in real estate secondaries dealflow. The full-year figure for first screenings of deal flow in 2016 was $36 billion.

Partners and its rival Landmark are reaching the $2 billion mark with their fundraising targets and that has led some onlookers to question whether they’re aiming to collect too much capital for what is still a marketplace in its infancy. But with dealflow of that magnitude, a more credible question could be: is there enough capital for private real estate secondaries?