GP-leds dominated last year. Blackstone’s €21 billion recapitalization of last-mile logistics business Mileway – the largest private real estate transaction of all time – was but the largest wave in a sea of manager-led deals, and 2022 concluded a run of strong years.
GP-led transactions accounted for 77 percent of total volume in 2022, according to Jamie Sunday, partner and co-head of real estate secondaries at Ares Management.
Tides change, however. While GP-leds were on the crest of a wave in 2022, expect a sea change this year. GP-leds certainly are not going anywhere, but LP-leds are coming back at a rate of knots.
Investor-led secondaries are returning to the fore as institutional investors increasingly rethink their investment portfolios. Discounts have widened and buying opportunities have proliferated.
Sarah Schwarzschild, co-head and managing director of BGO Strategic Capital Partners, the secondaries arm of manager BentallGreenOak, notes that secondaries interests in private real estate funds would typically trade at around a 10 percent discount. Discounts can now be had at between 30 percent and 50 percent for interests in well-performing vehicles.
The change in preference from manager-led secondaries to investor-led transactions picked up pace as 2022 wore on, following central banks’ ramping up of interest rates.
Real estate financing has become sharply more expensive, restricting profits and so holding back sales. Heavily indebted investments are looking precarious. The denominator effect is significant, too. Other assets have been marked down more than real estate values, which has been causing some investors serious headaches. Secondaries transactions are one way for those investors to offload real estate exposure. For some sellers, being free from future capital call obligations is another significant plus point.
Back to the start
While LP-leds are making a comeback, GP-leds remain compelling. Indeed, we could be witnessing the start of another golden age for real estate secondaries.
One man who was there for the original secondaries gold rush is Jeff Giller, head of StepStone Real Estate.
He founded Clairvue Capital Partners in the wake of the global financial crisis and says that back then he was mainly helping GPs and LPs to solve liquidity issues. The same dynamics are happening now.
“There is going to be a tremendous opportunity to recapitalize real estate vehicles to solve their overleverage problems,” he says. “Things we were addressing post-crisis… are absolutely a part of the environment today.”
Buyer beware
While buyers are able to anticipate high-quality real estate exposure available at attractive discounts, there are indications that buyers’ priorities are also changing in significant ways.
ESG considerations have shot up the agenda in recent years. The challenge for many investors is that plenty of the real estate assets coming available through secondaries transactions predate the change in priorities.
Many older vintage funds come from a time when sustainability was far less of a consideration than it is today.
Chris Reilly, head of real estate secondaries at Brookfield Asset Management, says: “Increasingly, we see that dealing with older assets just doesn’t make sense. For example, converting an older CBD office building to residential and being fully ESG-compliant is just not economically viable.”
Sustainability issues are only going to grow in importance. The EU has set energy performance targets for 2030, and those requirements are going to come into sharper and sharper focus as the deadline approaches. Bringing older assets into compliance could be both expensive and time-consuming.
One person’s challenge is another’s opportunity, however. Michelle Creed, partner and co-head of real estate secondaries at Ares Management, is undaunted. “While these portfolios potentially present higher risk, we see these funds as opportunities to engage directly with GPs and drive ESG implementation,” she says.
With an LP-led deal, investors can simply pass if an opportunity does not appeal, perhaps because of its ESG considerations. With a GP-led, new buyers coming in with a sizable check may find their equity gives them a corresponding level of clout to influence the manager.
Around the world
2022 was a quiet year for secondaries fundraising. Funds attracted around $670 million of capital, falling far short of the circa $8 billion raised in 2018 or 2020.
The market also remains dominated by the US. PERE data shows 57 percent of private real estate secondaries funds over the past five years have had a North America focus. Indeed, two of the three funds closed in 2022 had a US focus, with the third split between the US and Europe.
Of the 10 largest funds to have closed since 2013, six are multi-regional in nature. Three of the five largest funds in market are similarly multi-regional, while two of the five have a North America focus. Of the 16 funds in market tracked by PERE, two have a Europe focus and just one an Asia-Pacific focus.
That can be expected to change in the future. Bastian Wolff, founding partner of Asian secondaries specialist Aquilius Investment Partners, sees the secondaries market growing in Asia-Pacific.
“We see a lot of demand, not least because of the diversification that secondaries can provide,” he says. “There is a real need for a product that not only addresses diversification from a global perspective, but also more regionally for the Asia-Pacific market.”
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