There were $7 billion of manager-led transactions in the first half of the year, representing 26 percent of all secondaries trading volume, reported Greenhill & Co this summer. That was a record proportion, said the New York-based investment bank in its Secondary Market Trends & Outlook, July 2018 report.

The finding chimes with the experience at one of private real estate’s stalwart secondaries buyers. Fabian Neuenschwander, co-head of the US real estate business of Zug-based Partners Group, believes the lion’s share of deal-flow for its latest fund will come from primary vehicles reaching their maturity. That has certainly been the case for its opening outlays.

Neuenschwander: sees increasing overlap between secondaries and direct investing

“Close to 90 percent of the fund’s deals today are such non-traditional secondary investments,” he tells PERE in an interview shortly after his firm announced the latest capital closing of the fund, Partners Group Real Estate Secondary 2017 earlier this month. The vehicle, which was launched in October 2016, has attracted €2 billion, equal to its original target, although PERE understands a final closing at a higher amount is expected by year-end.

By that stage, the firm expects to have meaningfully added to the 15 deals already chalked up for Secondary 2017. Indeed, earlier this week, Partners acquired a nearly 2-million-square-foot portfolio of offices in California, valued at about $600 million, previously held in Swift Real Estate Partners Fund I, a fund reaching termination stage managed by San Fransisco-based Swift Real Estate Partners. Swift is actively harvesting the assets in the fund, which is at a mid-to-late period of its life, the source said.

As Neuenschwander highlighted, these are largely characterized by operators, developers or investors needing to restructure their holdings, or seeking exit options as the end of their original business plans nears. “We’re providing recapitalizations to mature funds in need of liquidity. Currently, we have a strategic overweight to opportunities in this regard to all regions across the globe.”

Among its outlays are the acquisitions of a portfolio of six office and multifamily assets across the US cities of Denver, Boulder, Seattle, Portland and Austin and a portfolio of seven assets across Sweden and Finland. Retail, logistics, hospitality and education-oriented properties feature among the Nordic assets.

In Greenhill’s report, the bank said the notable increase in tail-end portfolio sales was a contributor to pricing for real estate secondaries declining from 93 percent of net asset value to 90 percent in first half of 2018. “Due to the limited upside of tail-end funds….[they] generally price at 20 percent-plus discounts,” the firm noted. However, Neuenschwander reckoned pricing alone was only part of the strategy for hitting performance targets, the other half being asset improvements. He said: “Exits are a value play for us. But, often, there are a number of other value creation items that we believe we can capture.”

Listening to him, it would be fair to wonder if such investing methods really constituted secondaries trading at all, rather the deals might be considered direct. “The reality is it is probably somewhere in between,” responds Neuenschwander. “As a platform we see an increasing overlap between our direct and secondary investment.” To reflect this, at the turn of the year, Partners merged its direct and secondaries teams, which had previously operated independently.

It was an obvious move given such non-traditional deals featured prominently in predecessor vehicle Secondary 2013, and, vindicating the strategy, the $1.95 billion vehicle was generating a 20 percent net IRR for its investors, comfortably meeting its targets.

“Given where we are in the market, there is more of a focus on entrepreneurial ownership and value-creation going forward,” agreed Neuenschwander. “And that’s reflected in this strategy.”