Landmark, however, is not alone in its fundraising success. In November, Swiss-based Partners Group also highlighted the demand for secondaries when it closed its Partners Group Real Estate Secondary 2009 fund, raising an impressive €750 million. And Madison International Realty recently announced that it had raised $510 million for Madison International Real Estate Liquidity Fund IV, a vehicle that will target recapitalisations and debt restructurings as well as LP and partial ownership interests in core assets and some secondaries.
Furthermore, there are additional firms raising capital for funds targeting secondaries. Landmark’s rival, San Francisco-based Liquid Realty Partners, reportedly is in the market with a fund targeting $800 million of equity. Meanwhile, Aviva Investors had a $100 million first close in October on its global recapitalisation fund, which also will target secondaries and is eyeing up to $500 million of equity.
Taken together, these firms and their funds represent a significant amount of dry powder chasing the small, but growing, secondaries market for private equity real estate fund interests. Still, there might be enough product to go around, if only these firms were just competing with each other.
Alas, buyers of general private equity secondaries are looking to diversify their portfolios outside the mega buyout funds, which have been heavily traded over the past couple of years. As a result, many firms looking to diversify into a host of alternative segments, real estate among them.
To be sure, the opportunity for strong returns in secondaries has not been lost on some of the industry’s biggest names. In an interview published in March, Guy Hands, the founder of Terra Firma, singled out the real estate secondaries sector as the hottest in Europe.
Furthermore, it is not just private equity firms that are diversifying into real estate. Sovereign wealth funds and other large limited partners also are looking to diversify their private equity portfolios and are evaluating direct investments in real estate, including secondaries. Of course, other LPs are helping to drive the supply side, particularly at the smaller end of the spectrum, as they look to downsize, re-weight or liquidate some real estate positions.
Still, given the amount of capital – quantified and unquantified – targeting real estate secondaries, the question becomes how much opportunity is really out there.
In raising its new secondaries fund, Landmark based its decision to proceed on a mix of data and projections. The firm was able to determine that roughly $4.5 billion in real estate secondaries came to market last year, although less than half of that amount – $1.6 billion – actually traded and 70 percent of that occurred in the US. Based on those figures and expectations for prevailing trends, Landmark predicted that a further $2 billion to $4 billion in real estate secondaries would come to market annually over the next two to three years.
Landmark’s chief executive officer, Francisco Borges, said in a statement regarding the closing of the firm’s latest fund that the real estate secondary market was in the early innings of its evolution. Essentially, his statement serves to not only back up those projections but also alludes to greater opportunity ahead. In addition, he noted that the fund’s investment period had begun with 20 percent of its capital already committed.
While that initial momentum may bode well for Landmark, the firm’s projections are still more theory than certainty. Some may even go so far as to compare those projections to the wave of distressed loan portfolio sales that were supposed to hit the market in the wake of the financial crisis. Still, even if it manages to successfully invest its fund despite the increasing competition, Landmark's reality may be another firm’s wishful thinking.