COMMENT: Behold the goal hangers

Predatory buyers are increasingly paying attention to tail-end funds as a potentially rich source of attractively priced deals.

Anyone who has played in a casual game of soccer would be familiar with goal hangers. These are opportunistic folk who hang around the goal area with the express intention of pouncing on any opportunity to score when most of the hard graft to get the ball there has been done by someone else.

Crudely analogous for sure, but a similar approach is emerging in private equity real estate. A growing number of managers in the higher risk/return sphere are loitering with intent to pick off assets from portfolios where the value creation work is close to completion but, unfortunately for the manager in situ, the fund’s life is almost up and its investors want their money back.

Today, an end-of-fund-life focus has become a central tenet in the investing strategies of certain of the market’s largest businesses. They have extolled to PERE the virtues of taking on assets that are all but repositioned, but where the manager has been unable to extend its fund’s life beyond the original term. In these cases, the investors often have good visibility on the likely return outcome of their investment. When they sense a return isn’t worth waiting for any longer, they are keen for their manager to sell up there and then so they can redeploy their cash elsewhere, even if early redemption requires a discount.

In other words, it isn’t always the lenders to the fund’s assets that are forcing a sale. Indeed, with confidence returning to the lending community, willingness to roll over loans is not as scarce as it once was. 

Cognizant of that fact, certain savvy managers are paying just as much attention, if not more, to the thinking behind the equity in a deal as they are to that behind the debt.

And as 2004, 2005, 2006 vintage funds – a fair smattering of which failed to deliver but today contain assets positioned well enough for a rising market – start to divest ahead of their 2014, 2015 and 2016 expiry dates, expect to see the number of goal hangers to multiply.

In one illustration of the point, PERE’s Research & Analytics division has recently received approaches for lists of impending fund expiries in the coming years, ‘for research purposes’.

Of course no rule can ever be applied universally. INREV’s Fund Termination Study last year, for example, revealed that investors in funds with assets predominantly in Europe’s hotter markets were on the whole less keen to liquidate. For them, extending holding periods, even by just another year, would more likely yield better returns. Those with assets in southern Europe, on the other hand, were keener to get rid. The INREV study this year will make for interesting reading given how rapidly and widely markets like Spain and Italy have risen in the estimations of investors.

When ANREV publishes its own version next year, that too will be revealing. In Japan, for instance, where Abenomics has seen investors and managers alike foment enthusiasm for rental growth and further cap rate compression, the goal hangers certainly are assembling. PERE spoke this week with one recently capitalized Tokyo-based manager who articulated how buying from pre-crisis funds was an important part of his deal-sourcing strategy.

There are offshoots of the theme too. One deal by a private equity real estate firm in France earlier this week was an example of recently-raised capital buying a portfolio from a European property company that has shifted its focus elsewhere. This firm also has picked up assets from funds in their winter periods but has been alive to other sorts of sellers that wish to place their equity elsewhere. This is a different type of goal hanging, but it exploits the same sort of skill and instinct: being in the right place at the right time to grab the goal that someone else has worked so hard to score themselves.