The convergence of a number of market factors is driving a meaningful increase in investment activity and M&A among real estate asset managers. As a result, high-quality managers with strong track records and investor relationships are able to access diverse pools of capital for growth and diversification, as well as for monetization of partner economics to facilitate succession planning or for a partial cash-out.
Until the last decade, many of the highest-profile manager monetizations involved IPOs of large-cap, diversified alternative managers or large institutional investors taking advantage of their strategic importance to acquire a stake in their top relationships. A deeper third-party market began to develop as Dyal Capital raised its first fund dedicated to minority investments in asset managers, making its first major foray into real estate with an investment into Starwood Capital Group in 2016.
Investors in minority interest funds have been attracted to the strategy, as it gives them exposure to a range of high-performing managers across multiple vintages in a single investment. Over time, investor interest has increased significantly.
Investors in the space can take different approaches ranging from active involvement to more passive strategies and are generally longer term in nature. More recently, a number of funds have begun offering structured solutions such as non-permanent preferred equity, leading to an even wider range of options for managers to access liquidity.
A range of options
As more capital has entered the sector, competitive dynamics in alternative asset management have put an increasing premium on scale, growth and investor access. Institutional LPs globally are consolidating their GP relationships to concentrate on their best-performing managers and reduce administrative burden, which in real estate has allowed the largest managers to continue to gain market share.
As interest rates have remained low, allocations to alternatives including real estate are expected to grow faster than the overall market, contributing to high multiples and growth expectations for the publicly traded competitors. At the same time, sponsors who can execute large transactions have benefited from less competition for these bigger deals as well as greater profitability at the GP level due to scale economies. These combined trends have caused managers across the spectrum to think much more strategically about growing their businesses by entering new products and geographies, and through M&A – all of which require capital and currency.
The choice of execution among minority interest sale, structured capital or strategic M&A is situation-dependent and a function of long-term strategic goals and objectives. Underpinning the analysis for each sponsor involves valuation, control, cultural fit and synergies.
So far, investments in alternative asset managers during this cycle have mostly been very successful, and even if macro cycles become less favorable, the long-term factors driving performance are expected to remain in place. As a result, we expect capital to continue to be plentiful for real estate managers to actively consider a wide range of strategic alternatives to increase growth and optimize their businesses.