Today, it's not just that everyone's trying to get into real estate. Rather, it would appear that every alternative investment firm, broadly defined, is gradually expanding its mandate to include the activities of every other alternative investment firm, broadly defined.
This is a bit of an overstatement, but only by a bit. Managers of private funds are crossing boundaries into other strategies because they can and, in most cases, because they should.
The August issue of Private Equity Real Estate gives plenty of examples of convergence as a good idea, at least when executed by groups that know what they're doing.
Take, for example, the hospitality industry, a business that has produced great fortunes but also destroyed the capital of investors who entered the sector due to ignorance and vanity. As Aaron Lovell finds, hotels and resorts present the perfect opportunity for true private equity real estate investors being, as they are, a cross between a real estate asset and an operating company. The acquirer of a hotel needs to understand not only the fundamentals of location, physical plant space and cap rates, but in most cases also the finer points of running a restaurant, a spa and a retail operation – or risk many, many sleepless nights.
Paul Fruchbom examines another point of convergence – the emergence of hedge funds from the ranks of real estate investors. Investment groups that know well the hard assets underlying CMBS and REIT securities have an edge that traders focused on the technicals do not. No surprise, then, that private equity real estate firms are increasingly home to hedge funds. Expect this trend to continue.
Finally, private equity firms and distressed investors have lately come to see real estate as an integral part of their strategies. Witness the $5 billion acquisition of luxury retailer Neiman Marcus by private equity giants Warburg Pincus and Texas Pacific Group. As with other major retail private equity deals, the value of the underlying real estate of Neiman Marcus rivals the value of the operating business, and the optimal execution of this deal will require knowledge of both.
As the lines blur, expect PERE to bring clarity to the trends.
Enjoy the issue,