The financial markets are being restructured before our eyes – voluntarily, grudgingly and forcibly – and it would appear that real estate has been the unwitting restructuring agent.
We are still in the exhaustive stages of a great debt-bubble deflation that has claimed victims at the highest and lowest ends of the food chain. At the ground level are homeowners, or former homeowners, who gained confidence to invest beyond their means through aggressive lending packages and assurances that real estate prices could only go up, or at least always hold steady.
At the high-end are organizations that in January no one would have believed would cease to exist as we knew them before the year end – Bear Stearns, Merrill Lynch, Lehman Brothers, Fannie Mae, Freddie Mac, AIG. Like the hapless homeowners, these companies misread the risk, or more to the point, they misread the risk that the underlying mortgage holders presented.
Where do private equity real estate players fit into this drama? In a powerful role.
The way this magazine defines the industry, these general partners are principal investors; they are professionals investing on behalf of third parties, and charged with identifying opportunities to add value to assets over a limited period of time. They are not warehousers or repackagers of assets. In these respects, private equity real estate has an advantage both now and in the long term.
Certainly those opportunity funds that have large portfolios of weakening properties are in for a rough ride, but not of the same magnitude as other holders of real estate assets. Focused private funds do not need to hold capital reserves against their equity. They are not entangled in multiple counter-party obligations that require them to sell assets in the worst possible market.
And for the firms with great amounts of capital to deploy, like Lehman Brothers Real Estate (see p. 26), it's the RTC all over again. Ask an opportunity veteran about this and watch him smile.
Enjoy the issue,