AMERICAS NEWS: Secondary shift

Co-investment in physical real estate assets is playing an increasing role in the secondaries playbook. PERE Magazine March issue 2011

A quiet revolution is taking place in the private equity real estate secondaries sector. While the primary focus of many secondaries groups remains purchasing full or partial LP positions in commingled funds, there also is a growing trend to place co-investment equity in direct property deals with GPs.

For example, consider Morgan Stanley Alternative Investment Partners (AIP). After raising $370 million for its Phoenix Global Real Estate Secondaries fund, the firm is pursuing a small number of global co-investment opportunities that would see it commit between $10 million and $40 million in equity to a deal.

AIP’s real estate fund of funds head and chief investment officer Joseph Stecher explained that, in many cases, the deals might just be too large for a GP’s underlying fund, or the fund itself already might be fully invested. In either case, AIP would not take a controlling position, he stressed, as the firm prefers to invest in a club-style format alongside other equity interests.

“This is merely another form of financing, but it’s a natural extension of what we’re already doing when we underwrite GPs and their investments,” Stecher said, adding that AIP’s own institutional investors are offered the chance to co-invest in certain deals. To date, AIP has closed one co-investment and has another three in due diligence.

Another firm targeting asset-level opportunities in the secondaries space is Madison International Realty. In November, it increased its stake in New York’s Chrysler East Building to 48.9 percent after acquiring an additional $10 million of LP equity interests in the 32-storey office from German investors in a Commerzbank closed-ended fund. At the time, Madison president and founder Ronald Dickerman said the firm was eyeing passive LP equity interests in core joint venture projects where investors were looking to exit the transaction or where preferred equity capital was needed.