No choice but to think laterally

From deal-sharing to innovative secondaries swaps, investors are getting creative in order to get – or stay – allocated.

If there was a common thread in PERE’s conversations with institutional investors this week it was that they are getting creative in the execution of their allocation strategies.

Finding it harder to deploy capital sensibly in the current late stages of this cycle, these investors are turning to lateral thinking in order to grow their allocations to the asset class, or even keep them steady.

In one conversation, the Asia chief of one of Europe’s largest institutions said his organization, and peers besides, are engaging in a relatively novel approach to gaining access to deals in the region: they are sharing them.

This might appear counterintuitive given the intense competition for assets or that handing over a stake means more deals are needed to appease the large amounts of real estate dry powder these institutions hold.

Yet, the rationale shared with us is that partnering with like-minded investors, often taking equal splits, reduces competition. Yes, more deals are needed to meet targets. But versus constantly losing out in the auction room, it is the better outcome.

Furthermore, asset prices will remain lower because bidding is less intense. And, groups that have partnered up before are more likely to share dealflow again, the theory goes.

A recent deal saw the investor team-up with a peer in order to gain exposure to China, a market it had found difficult to access dealflow in the past.

Of course, this is not a tactic employed by all investors. But in markets where sourcing is hardest, teamwork over going solo has a growing fanbase.

In a much different, but no less creative tactic, one mid-size public US pension fund is using an unusual secondaries approach to ensure it stays allocated to the asset class instead of receiving its money back. US pension Sacramento County Employees’ Retirement System is exiting six core separate account holdings by offering to swap them for a single, consolidated position in an open-ended core fund. The value of that ticket, according to the $8.6 billion pension’s documents, could be around $250 million.

That trade is intended to cut the time and costs associated with an asset-by-asset or portfolio sale in the open market, something a secondaries executive, unaffiliated with the deal, described to us as a “no-brainer”. The prevailing wisdom here is that it is better to keep the capital alive than to get it back and then have to go through the rigmarole of deploying it again.

The deal is a win-win for SCERS and for whichever of the seven fund managers contending the transaction comes out on top. In one swoop, that manager gets access to properties with a gross asset value of $466 million as of June 30 without an elongated auction, as well as a new fund investor.

Whether for Asia investors teaming up or for US public pensions cutting swap deals with fund sponsors, PERE is seeing more instances of creativity borne out of need. As the cycle advances, expect to see more such out-of-the-box thinking.

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