At first glance, the real estate secondaries capital raising figures for 2017 paint a picture of a struggling sector, with less than $500 million of equity having a final closing status as of November, according to PERE data.
Yet, with significant dedicated pools of capital ready to be deployed into real estate secondaries, and more to come, secondaries managers speaking to PERE this month remain prosaic about the challenge.
Perhaps understandably so as, according to data from Landmark, $4.9 billion of real estate secondaries is under contract through September 20, 2017, and based on the current pipeline, the total investment volume for this year is expected to exceed the $5 billion achieved in 2016, potentially even exceeding $6 billion.
One reason for this uptick in transactions is that a secondaries trade is evolving. Beyond traditional buying of primary fund interests, fund recapitalizations in particular are becoming one burgeoning source of dealflow for today’s secondaries dollars.
While not new itself, this non-traditional secondaries trade has grown rapidly due to changing sell-side motivations brought about by the late stage in the primary investing market and an acceptance of the transaction as an efficient liquidity option. In the past, there was a stigma attached to deals like these, partly because of their nascence, but also because the vehicles in question were associated with the global financial crisis. Previously, fund managers would find themselves with assets in a vehicle at the tail-end of its life with no other way of moving forward without a recapitalization. With performances associated to the travails of the crisis, investors would be less tolerant of managers repurposing straggling assets in a new vehicle of which they would retain the management.
That stigma has largely shifted. In fact, beyond a solution to a problem, managers, often nowadays in possession of stronger track records, are even considering such recapitalizations as a way to grow their businesses, particularly in value-add or opportunistic markets with aspirations to extend offerings to core. Crucially, investors keen to keep exposure to core assets that would otherwise be challenging to acquire, are more accommodating.
And so, transitioning a tail-end portfolio, rather than liquidating it, is now a more agreeable possibility for managers and investors. Of course, such transitional work requires careful execution to protect against conflicts of interest. But, as PERE heard when compiling a special report on private real estate secondaries this month, some advisory practices are finding that aspect provides another viable business line for them.
Manager-led activity is increasing, with fund and portfolio restructurings totaling around $1.6 billion so far this year, according to Landmark Partners. With a primary market offering participants decreasing space for manoeuvre, it would be reasonable to expect that number to be meaningfully bigger next year.