Honey I listed the kids

Private real estate funds facing debt troubles and sunken values are eyeing a radical move – taking the portfolio public. By David Snow.

Managers of private real estate funds now find themselves harbouring an unusual emotion: public-market envy.

In the private market, limited partners have shut their wallets and are grilling their GPs for more portfolio information – rent rolls, cash flow projections, debt maturity dates, you name it. But public market buy-side investors are saying, “Give us more real estate”.

It’s enough to make a private-market guy pine for a listing or two.

The interest among opportunity fund GPs in sponsoring mortgage REITs is well known. Starwood, Colony and Apollo are just a few of the otherwise private fund-focused managers to price mortgage REITs.

Less well known is that many private fund managers are exploring taking their portfolios public.

Speaking at this week’s PERE Real Estate CFO Forum in New York, Sheridan “Schecky” Schechner, the US head of real estate investment banking for Barclays Capital, noted, “I’ve been having conversations with people about taking their portfolios public. The buy-side levels of interest are quite interesting.”

Schechner set forth several reasons behind the allure of a listing.
For one, over the past several months US REITs have been able to access the capital markets, as evidenced by a rise in unsecured debt issuances. As a mountain of debt maturities approach, opportunity fund managers may surmise that having a listed structure will improve their chances of securing adequate new financing. “Funds want to access the unsecured debt markets. But that’s hard to do with a closed-end fund,” said Schechner.

In addition, values are higher on the public market than in the private market and the ability to arbitrage the two markets may prove hard to resist.

REITs are not known as being conducive to transformative investing, but for many portfolios built during 2006 and 2007, the value-add game is over, and everyone knows it. These are portfolios that need to be stabilized, refinanced and carefully managed, and a REIT may be a good place for the assets to reside in the meantime.

If a major fund is in fact taken public, it will be interesting to observe the dynamics between GPs and LPs, or at least to read the investor letter describing a strategic move this monumental: “Dear investors: your fund interests have been converted into REIT shares. Enjoy.”

There isn’t much precedent in the alternative investment industry for listing fund assets. One similar move came from Ripplewood Holdings, a New York buyout firm, taking the assets from its Japan fund and listing them on the Belgian stock exchange. Some LPs were puzzled by this step, others angry. Ripplewood founder Tim Collins explained that the new structure would be better for pursuing the firm’s strategy in a changed market.