Mergers and acquisitions in private real estate remain limited in number, pushing expectations of a recovery in activity to later in 2023 and into 2024, as per the 2023 Mid-Year M&A Market Review from capital advisory business Hodes Weill.
The report, seen first by PERE, finds that only 10 M&A deals were closed or announced globally during the first half of the year, compared with 21 transactions in H1 2022.
Max LaVictoire, head of GP advisory services at the New York-based firm, emphasized that 2022 was “a tale of two halves,” explaining that the slowdown in M&A deals took hold in H2 when rising interest rates began to bite. Only eight transactions took place in the latter half of last year, meaning H1 2023 does represent some level of recovery – albeit slight.
“What has been really challenging over the last 12 to 18 months is how to price anything, whether that’s real estate transactions or M&A transactions, given the overall interest rate and capital markets environment,” said LaVictoire, who noted that it takes time for pricing expectations to catch up and ease the bid-ask spread. He also said the banking crisis that began in March played a key role in limiting the recovery of momentum.
Despite the muted activity, if H2 M&A continues at the same pace as H1, 2023 will end the year on a par with 2019 and 2020, and with more activity than 2017. Indeed, the previous two years have been the busiest for corporate transactions in private real estate since Hodes Weill began tracking the space in 2017.
In addition, private equity giant TPG’s acquisition of $73 billion-AUM credit and real estate manager Angelo Gordon in May skewed the total size of target acquisitions in H1, which rose from $154 billion in H2 2022 to $239 billion in H1 2023. Take that deal out of the equation, however, and acquisitions continued to lean toward boutique managers of $7 billion or less in AUM. This reflects the trend toward consolidation in the asset class, which LaVictoire expects to continue in a fundraising market that is especially challenging for smaller managers.
Succession planning and the need to diversify operations are further motivations. Indeed, the report shows seven of the 10 transactions were either majority interests or 100 percent stake sales.
“If you think about the timing of when a lot of real estate managers were created, in the wake of the global financial crisis, a lot of those business are quite mature, with founders that are thinking about succession planning. This was driving quite a lot of activity pre-interest rate volatility, and we think there is a lot of pent-up activity there in the wake of this recovery of stability,” said LaVictoire.
Hodes Weill expects to see more transactions in the second half of the year than the first, with three deals already announced in July and discussions ticking up over the last two to three months, according to LaVictoire.
The return of some stability in capital markets is key to this, he added. “Among the publicly traded alternative asset managers, as an example, their average EBITDA multiples decreased about 40 percent between the first half and the second half of last year. Through the first half of this year, they remained relatively stable from the second half.”
Also set to boost the latter half of the M&A scene is growth in the number of firms looking to make strategic acquisitions for geographic expansion, such as US firms looking to make inroads in Europe, and vice versa. LaVictoire also expects a continued increase in the number of new firms, with portfolio write-downs having reduced the value of existing carry.
“I think that’s going to result in an increase in new companies being formed and a higher level of diligence on the part of buyers with respect to employee retention, given carry is less impactful as far as keeping the team together [goes].”
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