Dietary requirements

Limited partners are starting to reduce the number of relationships with fund managers. And as investors start shedding the pounds, private equity real estate secondaries are getting ready to pick up the slack. By Zoe Hughes

When the economy slows there is always a natural reaction to tighten the belt a notch or two. Whether it's postponing a family vacation, making do with the family saloon car for just another year, or opting to convert the family attic instead of moving house, belts all over the US, and in most parts of Western Europe, are being tightened in anticipation of harder times to come.

In the wake of the credit market dislocation, private equity real estate is undergoing a similar process with general partners and limited partners looking to their waistlines to see where they can shed a few pounds. For fund managers it's generally a case of looking at the cupboard and judging just how long the supplies can last. Times have been good and for many the road ahead presents as many deal opportunities as it does challenges.

Unfortunately for first and second-time funds, it appears they may be the equivalent of the Atkins diet.

For investors however, the good times have left them with a full stomach and a hefty receipt. Many limited partners are now facing the reality of dining out with too many fund managers. Limited resources, and staff numbers, mean a team of just four or five investment professionals are having to deal with a multitude of funds. Kingsley Associates recently found that the average number of third-party investment manager relationships per plan sponsor increased from 6.8 in 2003, to almost 13 in 2008. Combined with the impact of the denominator effect – which has seen real estate and private equity rise as a proportion of an LP's allocation allowance owing to falling values in equities and fixed income – and most investors are now looking for ways to lose weight.

Unfortunately for first and second-time funds, it appears they may be the equivalent of the Atkins diet as investors increasingly target track records and previous IRRs as a means of counting the calories. Already California Public Employees Retirement System (CalPERS) has started to streamline the number of funds it works with, with the number of relationships expected to be slashed over the next three to five years according to industry professionals. Some executives have predicted a raft of “one fund wonders” with fledging fund managers needing to hit a higher “bar” in the near future just to attract commitments from LPs. Most expect the private equity real estate industry to undergo a period of consolidation, some even warn of “blood on the streets.” Whatever the degree of rationalization though, one part of the industry is set to benefit: secondaries.

As our feature on the industry shows (p.26), as investors seek to realign their portfolios to take account of over-allocations to the real estate asset class, new internal strategies and even new geographies, secondaries firms are waiting in the sidelines ready to grasp the opportunities. Last year, there were an estimated $1 billion (€644 million) of trades in the real estate secondary market. During the next 18 months to two years, experts predict that it could be as much as $5 billion. Over time, it is argued, the market has the potential of being at least a third – or even half – the size of the private equity secondary market, which last year saw an estimated $15 billion in transactions, according to San Francisco-based placement agent Probitas Partners. Such a rapid expansion of the marketplace however will inevitably lead to a mismatch between supply and demand. It will, according to one private equity firm, prompt many in the secondaries real estate sector to make “cheeky bids to see how desperate the sellers are.”

This imbalance will ultimately right itself as the credit markets recover from the current crisis, but for real estate secondaries a step-change is taking place. Trading begets trading, as the cliché goes, and as the secondaries marketplace becomes more liquid so the sector will grow, attracting even more players into the sphere. What will be fascinating to watch is just how quickly the market will expand.

Former ProLogis exec joins SV Capital
Real estate investment and development firm SV Capital, which focuses on luxury resort, residential and retail properties, has appointed John Seiple Jr., the former president and chief executive officer of North America for ProLogis, as a partner at the firm. He will focus on its capital market activities. Englewood, Colorado-based SV Capital is currently developing the Castello Di Casole in Tuscany, Italy; Estates of Grace Bay in Turks and Caicos Island; Botany Bay in West End St. Thomas, US Virgin Islands; and One Steamboat Place in Steamboat Springs, Colorado.

JER continues Latin America expansion
Continuing its focus on the region, JER Partners has appointed former MIRA Companies executive Ariel Amavizca as head of risk management in Latin America. Amavizca was previously chief investment officer of private equity real estate firm MIRA Companies, an affiliate of the Black Creek Group. In his new post, Amavizca, based in Mexico City, will be responsible for structuring, analyzing and managing risk aspects for all JER investments made in Latin America. Last month, JER president and chief operating officer Michael Pralle told PERE about the firm's plans for Latin America, including the appointments of Roberto Perroni to lead its Brazil office in Sao Paulo and Sergio Hernandez as its Mexico-based director.

Thompson appoints Schutz to head $250m fund
Thompson National Properties, the private equity real estate firm founded by former Grubb and Ellis chairman Anthony Thompson, has appointed Lauri Schutz as chief financial officer of its $250 million opportunity fund, the Bruin Fund. Schutz was former finance vice president of senior housing operator, Renaissance Senior Living. In her new post Schutz will be responsible for all financial reporting and accounting at the fund.

Liquid hires mortgage pro as director
Private equity real estate secondaries firm Liquid Realty Partners has hired John Arens to join the firm as director. He will be based in the firm's San Francisco headquarters. Arens was formerly vice president of publicly-traded REIT Redwood Trust, managing its residential investment services as well as supporting its mortgage subsidiary. Scott Landress, Liquid managing principal and chief executive, said Arens would provide the firm with key real estate financial and securitization skills. Liquid closed the largest dedicated real estate secondary fund on $572 million (€369 million) last December.

Cantor Fitzgerald appoints head for new RE group
Financial services firm Cantor Fitzgerald has appointed former WCI Communities executive Rodney Montag as joint executive managing director of its newly formed real estate group. Montag will work alongside Andrew Stark in building the platform, including a real estate opportunity fund, targeting distressed real estate investment loans and development projects. Montag was previously vice president of acquisitions at master-planning development company WCI Communities, where he worked with Stark for more than 10 years. Cantor Real Estate, launched last month, intends to take advantage of the current market dislocation, according to Cantor's chairman and chief executive Howard Lutnick, who said at the time there were “significant opportunities” for value-add investments and developments.