Last November, when I reviewed the state of real estate advisory M&A in these pages, I wrote that the “deal engine has stalled.” By the end of 2023, the numbers bore that out: only 18 mergers or acquisitions took place compared with 28 in 2022 and 31 in 2021 – admittedly active years following a lull during the covid year of 2020.
In the first quarter of this year, the picture was similar to 2023, with just a handful of deals. As was the case last year, this stands in contrast to other alternatives sectors such as credit, private equity and infrastructure, where numerous and large deals have occurred. The reasons for the real estate slowdown so far this year are several and have not changed for acquirers, among them continued uncertainty about parts of the real estate market and interest rates, albeit to a lesser degree.
That said, the most common concern we are hearing involves legacy portfolio risk. Many acquirers are considering funds from 2021 or 2022, for example, and saying: “We’re going to wait to see how those funds perform before we acquire a business. Because if they end up printing a 6 or 7 percent IRR in that vintage, it’s going to be hard for those firms to raise capital.”
It is important to note that this attitude is representative of the group that has adopted a broad risk-off approach, however. There are other more opportunistic, if cautious, players that have entered the market only to walk away from targets when their portfolio due diligence came up short. Still, this group recognizes that the current vintage of funds could deliver outsized returns, given the market dislocation, providing a tempting rationale for the right acquisition.
Readying for retail
Amid this challenging environment, there is a notable addition to the M&A story that reflects a larger trend within the alternatives space: the individual investor. Increasingly, potential sellers are telling us they want to pair up with partners that can push their products into the retail channel. Traditionally, they would have asked: “Can acquirer A introduce me to new institutional LPs in a geography that I’m unfamiliar with?” Or: “Who can you introduce me to that has relationships with large institutions worldwide with robust balance sheets?”
There is good reason for this sea change among both buyers and sellers. As fundraising among institutions lags, Bain & Company estimates the wealth market worldwide has between $8 trillion and $12 trillion in funds available for private markets investments.
In the US, individuals hold $24 trillion in their various retirement accounts alone, according to the Investment Company Institute. On both sides of the Atlantic, regulators are also relaxing the barriers to retail investment in alternatives.
This trend has already played out in numerous deals involving alternatives managers, some specific to real estate and others more general.
Toronto-based Sun Life Financial’s 2022 acquisition of a majority stake in Advisors Asset Management is a significant example of a more general deal designed to draw retail investors. AAM provided a US retail distribution platform for Sun Life’s menu of alternative products, including those from real estate investment manager BentallGreenOak.
Ares Management’s 2021 acquisition of Black Creek Group, which at the time boasted the second-largest retail fundraising platform for non-traded REITs, represented a major initial example within the real estate advisory space.
In what Ares describes as its “institutional direct” assets under management, totaling $329 billion, the portion from high-net-worth investors and private banks rose at an average annual rate of 67 percent between 2018 and 2023, more than double the overall growth rate. HNW investors now account for 6 percent of Ares’s total AUM of $420 billion, of which real estate represents 12 percent.
Toronto-based Colliers’ purchase of a majority stake in US real estate advisory firm Versus Capital, completed in 2022, was another notable deal. Versus delivered $6 billion in AUM along with an established network of registered investment advisers, among them some of the largest in the US.
Last year, Focus Financial Partners acquired Origin Investments, a real estate fund manager with 3,500 HNW clients and some $2 billion in AUM. Focus wrapped Origin into an RIA affiliate with an eye on extending Origin’s products to its large network of partner firms.
“The world of the 60/40 portfolio is over,” former Focus CEO Rudy Adolf told Barron’s at the time.
Indeed it is. Look for more of these retail-oriented deals to play out in the near and longer term. More generally, we do anticipate a pickup in advisory deals in the second half of 2024.
For one thing, after 12-18 months of sitting on the sidelines, buyers need to get on with their strategic priorities. For another, while the direction of interest rates remains an issue, the industry is adjusting to the higher-rate environment. Additionally, the industry is gaining a clearer picture of the post-covid marketplace.
For many potential acquirers, these factors will provide the impetus to pursue deals.
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