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EXCLUSIVE: Partners restructures DLJ fund

The Zug, Switzerland-based private markets investment manager has bought out of all of the limited partners in the private equity real estate firm’s 1999-vintage fund.

Partners Group has completed the restructuring of a 1999-vintage fund from DLJ Real Estate Capital Partners, which involved the acquisition of a tail-end portfolio of US real estate assets from the vehicle. The Zug, Switzerland-based private markets investment manager is said to have struck the deal on behalf of multiple vehicles, including its $1.95 billion real estate secondary fund, Partners Group Real Estate Secondary 2013. The portfolio, which was purchased through the secondary market, comprises seven assets with an aggregate gross value of $163 million. Terms of the transaction were not disclosed.

The firm disclosed the vintage year of the DLJ program but declined to name the specific fund. However, according to PERE Research & Analytics, DLJ’s 1999-vintage real estate fund was DLJ Real Estate Capital Partners II, for which the firm raised a total of $1.2 billion. DLJ, which Partners has retained to continue managing the assets, could not be reached for comment at press time.

Commingled real estate funds typically have a 10-year life with the potential for a one- or two-year extension. In some cases, the funds reach the end of their scheduled lives but may still have a handful of assets remaining. In such situations, the general partner may need more time or money to harvest those assets, which will require the fund’s limited partners to decide to either participate in the extension or liquidate their remaining interests in the vehicle.

In the case of the DLJ fund, which was already past its originally scheduled maturity, Partners Group sought to extend the life of the fund by up to five years, although each of the remaining assets will have its own separate business plan during the fund’s extended holding period. “The vast majority of investors decided to go along with the liquidity option and as a consequence, it made sense to buy out all of the limited partners,” said Marc Weiss, partner and head of real estate secondaries at Partners Group, in an interview with PERE.

The purchase of the DLJ real estate portfolio – which includes two hotels in New York and Tennessee and two developable land parcels in California – is an example of a non-traditional real estate secondary transaction, which involves opportunities outside of the traditional acquisition of limited partner stakes in funds. “The underwriting for these types of transactions is very different from traditional secondaries, in the sense that as a manager we’re more involved with understanding the business plans for the assets, and therefore you’re doing a deeper underwriting at the asset level, and you’re taking on more concentrated risk because there are few assets, given that it’s the end of the life of the fund,” said Weiss.

While portfolios of LP fund interests often are now fully priced, discounts with non-traditional secondary deals aren’t always the case, either, and typically depend on the acceptable return profile for the risk that the firm is taking on, he added. “It’s more likely that you’re going to see a discount to net asset value than a premium to NAV, but it is possible to see a premium to NAV.”

Partners had struck a number of non-traditional secondary deals over the past few years, and expects such activity to increase going forward. “When we look at the amount of funds of the 2005, 2006 and 2007 vintage which are maturing over the next few years, we see more opportunity to do these deals,” said Weiss. “Some of these assets may not be ripe for sale and sponsors and investors may see the benefits of holding on over an extended holding period. But you do have other investors that think that it makes sense to liquidate and be done with it, which then creates a dynamic which enables this type of transaction.”

In other recent real estate secondary transactions, StepStone Group Real Estate, the property business of private markets firm StepStone Group, announced Wednesday that it had completed a $28 million investment in a portfolio of senior living, student housing, self-storage, and medical office properties managed by Austin-based fund manager Virtus Real Estate Capital, alongside an investment into Virtus’ 2012-vintage fund, Virtus Real Estate Capital.