Friday Letter Fear and loathing in Chicago

Many private equity real estate groups have money to spend, but no one wants to call the bottom of this crazy crazy market. 

When the private equity real estate industry last met for the Pension Real Estate Association (PREA) conference in March, delegates were searching for clarity amid the early turbulence of the credit crunch.

Investors knew at that time that the emerging distress would present opportunities. It was just that people were not sure exactly what form those opportunities would take.

Six months later, as the industry reconvened for PREA’s fall conference in Chicago this week, those same people can now see the opportunities at hand with more clarity. They are, as many have said this week, “historic” and “once in a generation.”

The big question that has been left hanging, though, is one of timing.

After the breathtaking events of the past month, most investors expect depressed US real estate and capital markets to continue well into 2009 and possibly beyond, without any likelihood of a turnaround before the latter part of 2010. One veteran real estate investor told PERE he didn't expect normality (for any given definition of the word) to return fully until 2013.

Unsurprisingly given such long-term bearishness, none of those present in Chicago expressed much appetite for being the first to attempt to catch a falling knife.

And who would blame them. Would anyone have believed just 12 months ago that within the space of 20 days we would have questioned the solvency of General Electric, seen Merrill Lynch and Lehman Brothers cease to exist as independent entities and AIG, Fannie Mae and Freddie Mac bailed out by the US government?

Private equity real estate groups may have lots of equity capital burning a hole in their pockets, but the majority clearly prefer to wait on the sidelines and watch events as they fall around their ears. No-one wants to be the next TPG, after all.

So as private equity real estate fund managers eye the opportunities ahead, there is a cautiousness as to when the best time will be to seize them with both hands. As one conference speaker said: “Waiting is better.”