Breaking the mold

Earlier this week, the New Jersey Division of Investment finalized an agreement to sell a massive portfolio of real estate fund interests near par to an unconventional buyer. The transaction wasn’t expected to turn out that way.

When the $75.64 billion pension plan first announced the possible sale of one quarter of its $4 billion real estate portfolio in January, the news unsurprisingly generated a huge amount of interest among real estate secondaries players.  While some sizable deals had closed in the market, no real estate secondaries sale in the $1 billion range had ever occurred.

The unprecedented size of the transaction led some to doubt that such a sale would even go through. After all, some prospective sellers of large portfolios in recent years were able to offload just a portion of the fund interests they intended to sell or withdrew the offering entirely after not receiving satisfactory bids. 

Others anticipated that such a transaction would involve the portfolio being broken up and sold separately to different buyers, since no single real estate secondaries firm had raised enough capital to buy all of the fund stakes on its own. And since secondary market sales invariably have required sellers to accept a 15 percent to 20 percent discount on the net asset value of the fund interests in question, many expected that New Jersey would need to do the same.

Many of those assumptions, however, were predicated on the belief that a real estate secondaries firm would be the purchaser of New Jersey’s fund interests. The actual buyer, however, is a partnership between publicly-traded commercial real estate investment and asset management company NorthStar Realty Finance, its non-traded REIT affiliate and Goldman Sachs Asset Management. 

For its part, NorthStar closed on its first major real estate secondaries deal in December, when it bought stakes in 51 real estate funds from TIAA-CREF. It should be noted that NorthStar only acquired partial interests in the TIAA-CREF portfolio in contrast to the New Jersey sale, where the company, along with its partners, intends to wholly own the fund interests after four years. It should also be noted that many had considered the TIAA-CREF deal to be a one-off transaction.

So, the New Jersey sale is indeed a milestone event for the real estate secondaries industry, and has shaken up the market to a certain degree. After all, if buyers like NorthStar are willing to pay at or near par for real estate fund stakes, then traditional real estate secondaries firms – which rely on discounts to help them achieve their return targets – could find it much harder, if not impossible, to compete.

It still may be too early to determine how the real estate secondaries market may change going forward. What’s clear, though, is that the market is changing and transactions are more likely to involve different types of players and different structures than in the past. PERE has learned of at least one other atypical real estate secondaries offering currently in the market. And that leads us to think unconventional transactions like New Jersey’s may be a sign of things to come.