According to the Paris-based private equity firm Ardian, the secondaries market in that sector has now “come of age”. Ardian says the raising of $10.8 billion for its latest private equity secondaries fund, announced this week, is testament to the maturity and sophistication of the sector.
In PERE’s editorial, we regularly compare the growing private real estate secondaries market and its better established private equity cousin. It is clear in speaking with the major movers in real estate secondaries that they benchmark perhaps not all but much of its evolution on the private equity version of the market.
This, then, begs the question: does a $10.8 billion fundraising for private real estate secondaries constitute a milestone that must be reached before it too can say it has ‘come of age?’
In fundraising terms, private real estate secondaries has some way to go. The biggest fund raised so far remains Zug-based Partners Group’s Partners Group Real Estate Secondary 2013, which closed on $1.95 billion of commitments in 2014, less than one-fifth the size of Ardian’s recent effort.
If we make transactional comparisons between private real estate secondaries and private equity secondaries, again, the former is clearly lagging. Landmark Partners, the Connecticut-based firm which runs both private equity and real estate secondaries strategies, reported $8.2 billion of real estate secondaries exchanged last year – less than a quarter of the amount traded in private equity secondaries in the same time period.
Totting up yearly transactions since its records began in 1996, Landmark says $29 billion of real estate secondaries have now been traded overall, only three times Ardian’s latest raise and little more than the $27.4 billion the firm has raised for private equity secondaries in the last five years. That further underscores the chasm between the two asset classes.
But if we instead consider the respective sizes of the two markets in terms of primary AUM, and then relate that to our question about Ardian’s raising, it appears private real estate secondaries’ coming of age might actually be somewhat closer than first imagined.
So let's have a look: primary AUM in the real estate space is less than $500 billion, while the private equity fund space extends to over $1.5 trillion. At this ratio of 1:3, if Ardian's $10.8 billion is aptly sized for private equity, then a real estate secondaries fund would have to raise around $3.6 billion to have a similar impact on its market.
Coincidentally, if you add together the two largest private real estate secondaries funds formed to date, the aforementioned Partners Group vehicle and Landmark’s latest real estate fund, Landmark Real Estate Partners VII, which closed on $1.6 billion in 2014, then you get remarkably close to $3.6 billion. That is a compelling thought, especially when you consider that private real estate secondaries only really got going after the global financial crisis.