Dedicated secondaries buyers have two nagging concerns at the moment. One is the lack of deals being transacted. The other is the perception there is a lack of deals being transacted.
Partly addressing the second issue, Simsbury, Connecticut-based firm Landmark Partners recently produced a real estate brief for clients showing the increase in secondary deals volumes it expects going into 2012.
Landmark managing director of Europe and Paul Parker, analyst Andrew Holmberg and partner Paul Mehlman, who produced the work, said private equity real estate secondaries have tended to track private equity equivalents. Under normal conditions pure private equity secondaries trading volume in a given year typically account for between 2.5 percent and 5 percent of average annual commitments to partnerships made in the prior three to seven years.
Landmark said that since 2003, private equity real estate secondaries have experienced a similar percentage range of trading volume. The firm found that in 2008 and 2009, volumes averaged $850 million. Assuming a 5 percent turnover rate, and taking into account increased seller motivation and larger fund commitments by LPs in recent years, Landmark forecasts the volume will reach almost $4 billion in 2012.
This points towards more activity for secondaries specialists like Landmark. But today many buyers are bargain-hunting limited partners. LPs acting in this way are unkindly called “secondary tourists”.
Experts point to the length of time it has taken Austrian property group Immofinanz to offload a reported €800 million portfolio of 28 interests in European and Asian funds as evidence of a very wide bid-ask spread in the market.
At the same time, insiders say that some of the motivation among LPs to sell has gone away due to stabilising economic factors.
That said, Landmark insisted in its real estate brief that it continues to see varied motivation for sellers, including the need to monetise illiquid investments to raise cash; the need to alleviate the denominator effect; future cash planning needs, such as meeting unfunded liabilities; and having “dry powder” for fresh opportunities.
There are also ongoing issues such as asset allocation changes, alteration of real estate strategy, the desire to exit funds with poor performance and the need to reduce the number of general partner relationships. Some LPs are also eliminating older “tail-end” investments or reacting to turnover of investment management personnel.
Whatever the motivation, Landmark says that “2008 and 2009 have already generated historically significant trading volume … The confluence of rising commitments to private real estate vehicles and the current market duress is stimulating material growth in secondary market activity.”