EUROPE NEWS: Seconds out

Recently, PropertyMatch, the UK real estate secondaries trading intermediary, celebrated a milestone: the completion of more than £1 billion (€1.25 billion; $1.56 billion) of fund trades since its September 2009 launch. Upon the stellar figures,

Michael Levi, head of indirect property at GFI, which co-owns the on-screen platform with CBRE Real Estate Finance, said: “As we approach the formal adoption of Solvency II, we have no doubt clear market pricing will become increasingly important region-wide. We expect both the volume and number of trades to continue in an upward trajectory.”

Indeed, the system seems to be a growing success. So much so, in fact, that it has led its creators and others to ponder whether there also should be a US equivalent allowing UK investors exposure to US funds.
The argument for such a platform is fairly straightforward. Since 2007, there has been a new paradigm, with the value of liquidity greater than ever. Some UK investors are seeking a “conservative approach” and are looking towards the vast US market, where a recovery phase seems to be in progress.

At the same time, they do not necessary want to be locked up in a closed-ended structure, so surely the market needs to provide more liquidity.

Melville Rodrigues, partner at law firm CMS Cameron McKenna, said: “Liquidity is becoming an increasing concern for pensions and other institutional investors when considering commitments in unlisted closed-ended property funds. They are attracted by the relative stability of income return offered by the funds, but are looking for that return to be combined with exit options before maturity.”

To those outside of private equity real estate, it might come as a surprise that, despite its size, the US does not have an on-screen secondaries trading platform. Instead, there are various firms that discreetly broker private placements of limited partner interests. Such brokers include Lazard, Swiss bank UBS and boutique firm Cogent Partners.

Still, why is there no US on-screen secondaries market provided by an intermediary? Experts say one very big reason is that transparency is poor and deliberately kept so. In the majority of instances, if not all, one needs the approval of the manager of the fund in order to assign stock.

Jeff Giller, managing partner at Clairvue Capital Partners, said: “There really is no viable trading platform for US secondaries. One reason I do not believe it would work as well as it does in the UK is due to the opacity of the US market relative to the UK’s. Under the UK system, funds are valued by highly-qualified chartered surveyors on a quarterly basis, but in the US they are valued by appraisers that are typically less qualified.”

Giller also noted that the UK had the IPD index as a reliable tool to gauge market values on a sector-specific basis, whereas the US had no such index, except possibly the NCREIF, which just covers unlevered core properties. “As a result, buyers of secondaries must do a lot of due diligence,” he said. “A trading platform where execution is expected to be relatively quick doesn’t really work.”

One New York-based multi-manager, who wished to remain anonymous, said: “The fund managers that invest in secondaries don’t particularly want a better trading platform. Improved efficiency in the market is just going to reduce their margins, so they will not push for this.”

The multi-manager continued: “Furthermore, virtually all of the existing funds require GP approval to transfer ownership, which makes the process inefficient as well.  The managers have no incentive to change this practice, and they won’t change the documents for the hundreds of funds already existing. The LPs don’t even have the incentive to push for this document change as they want to know that other LPs will be vetted by the GP. If they had wanted a smoother exit, they would have accessed the listed REIT market.”

So, the only way that this practice could change in the US would be if a handful of large funds agreed to change their documents and participate in an exchange. Is that likely to happen anytime soon? “No,” said the multi-manager. “Somebody may try, but the profitability of the model seems questionable given the effort to change.” More importantly, the market is not clamoring for it.