The private equity real estate industry is facing a raft of challenges and opportunities that do not stem directly from property supply and demand. Instead, cash flow, or lack of it, is driving this market.
Access to cash is the most important determinant in the deal market, and it is, for now, the most important influence in the fundraising market.
Yes, it would appear that certain parts of the US, Spain, Macau and the UAE have more product than buyers, and these markets will see great combustions of fear and greed in the coming months. But the more important supplydemand imbalance has to do with liquidity.
Corporate holders of fundamentally sound properties are having trouble servicing their debts. Hedge funds have liquidity problems of a unique nature. Facing a wave of redemptions from their own investors, many will eventually eye their illiquid side pockets, in which are housed property investments that aren't doing much for performance anymore.
Private equity real estate funds, for the most part, have cash, thanks to an incredible past few years of fundraising activity. But that run appears to be coming to a pause, and for reasons that, again, have little to do with a drying up of LP demand. In fact, many LPs are worried that they simply won't have enough cash.
Culprit No. 1 is the “denominator effect” which is all too familiar to GPs on the private equity side. Thanks to crumbling public equity values, the size of the overall institutional pie has shrunk, causing the less volatile allocations – real estate and private equity – to loom much larger. In some cases LPs are reluctant to commit further to our asset class because they are already fully allocated. In other cases, they have taken a hard look at their expected future cash flows and come to the worrying conclusion that they won't be able to meet capital calls.
As this issue of PERE goes to press, many GPs are having nervous conference-table conversations to assess whether the ongoing, or next, fundraising will really be able to hit target. Isn't it a cruel Catch-22 that just when the buying opportunity of a lifetime pops up, there isn't enough cash to really make a go of it?
But those with access to cash are going to be having fond memories of the 2009 vintage year for many years to come.
Enjoy the issue,
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