Newport Beach, California-based real estate fund manager BKM Capital Partners and StepStone Real Estate, the real estate arm of New York-based private markets investment firm StepStone Group, have formed a partnership through a GP-led direct secondary transaction, PERE has learned.

Under the BKM-SRE Partnership, StepStone will acquire a 20-30 percent ownership interest in two stabilized Class A light industrial properties in Las Vegas and Burbank, California, from two BKM investors. The investors, a large Canadian family office out of Canada and an insurance company, were limited partners in BKM Industrial Value Fund II, the second in BKM’s series of value-add funds focused on the small and mid-bay light industrial space. BKM closed on $354 million for Fund II in 2019, according to PERE data, and currently is in the process of harvesting the vehicle.

Brian Malliet BKM
Malliet: BKM has just closed on its first GP-led secondary deal

In addition to acquiring the ownership interests, Stepstone, which is seeking to increase its exposure to value-add industrial assets, will commit fresh capital to expand the partnership’s portfolio by co-investing in the acquisitions of small and mid-bay light industrial assets across the western US. The partnership will likely complete one or two more deals by year-end, BKM chief executive and founder Brian Malliet told PERE.

The deal represents the first manager-led direct secondary transaction for BKM, Malliet said. Neither investor was in a distressed situation – while the family office was going to use the sale proceeds to build out a personal winery, the insurance company wanted to post big returns for the second quarter, he explained. With the latter, “they went through their portfolio, and looked for which managers and assets they thought would get the best returns that were going on,” he said. “They obviously liked what they saw with our returns, and they could perform with the best returns from liquidating their particular interest in the properties we have.”

Malliet said the firm had not received exit requests from its other investors. “When you’re posting 25-plus levered IRRs, 2.5x multiples, it’s not a product type or a space you want to get out of.”

Fund I, which is fully liquidated, was generating a gross internal rate of return of 25.8 percent and gross multiple on invested capital of 2.6x and a net IRR of 20.4 percent and net multiple of 2.2x as of March 31, according to BKM performance data shared with PERE. Meanwhile, Fund II was producing a gross return of 29.9 percent and gross multiple of 2.5x, and a net return of 25.3 percent and net multiple of 2.1x.

Jeff Giller, head of StepStone Real Estate, concurred the assets in the partnership – which “are solid, stabilized, well-located properties” – were not in distress. “This was, I would say, more emblematic of the last epoch of investing,” he noted. “And now we’re moving into this new period where the catalyst for transactions will be completely different.”

Jeff Giller StepStone
Giller: secondaries transactions will now have ‘completely different’ catalyst than before

Giller added that Stepstone’s investment pipeline in secondaries has increased by 55 percent in terms of transaction volume and by 39 percent in terms of number of deals in the first half of 2023 compared with the second half of 2022. He expected the volume of closed transactions to continue to increase as the bid-ask gap narrows over the coming months.

Driving some transactions has been investors’ liquidity needs, as limited partners strive to meet funding obligations and capital calls while also facing a dearth of distributions from muted transaction activity.

“A GP-led secondary transaction could come exactly in a transaction like this, where the LPs need liquidity and can’t fund certain obligations,” he said. “So the GP comes to us for a solution as opposed to the LP coming to us, and we work with the GP to buy out the LP.”

Most of the deal flow is coming from GP-led secondaries and recapitalizations as the industry faces a wall of maturing debt, Giller said. “As loans come due, owners are looking for solutions to help pay down their existing debt given the refinancing shortfalls,” he remarked. “So that’s really the big catalyst for transactions in the market now and how we’re seeing the face of the market changing.”