Recently, I was talking with a friend – an industry veteran – about the government efforts to get us out of this mess. He said, “It’s not really going to help much when someone is thrown a life preserver when what they really need is a Coast Guard cutter.”
The life preserver my friend referred to is, of course, the banking bailout giveaways (which are looking more and more like throwing good money after bad).
It remains unclear whether we in the private equity real estate industry are going to serve merely as potential life preservers or the Coast Guard rescue ships for a market in grave danger.
It is also unclear whether we are going to be the beneficiary of any of the free lunch money being doled out.
People who have been through multiple cycles, especially that of the early 1990s when the RTC was created, are today writing articles and appearing on panels relating their experiences and how these experience correlate to the unfolding situation. They say that the RTC process worked and could work again: while the RTC then made things up as it went along, its general operating procedures can be implemented in the current environment as well.
The concern of many is that in its infinite wisdom, the federal government will decide to recreate the wheel, which will cost more and perhaps not be as effective and efficient as resurrecting the RTC.
So the bailout continues, and as write-downs of real estate assets ranging from low single digits to more than 20 percent continue to be announced, opportunistic players tell me that they are ready, willing and able to step in to provide “rescue capital” or take assets off the hands of those less fortunate. Don’t forget, my friends remind me, the profit is made on the buy.
Those who are in the game of recapitalisations and purchase of interests in the secondary market tell me they are starting to see opportunities flowing their way. There is a flood of opportunity, but sellers should be mindful that this will not necessarily be met with a wall of capital.
Buyers also need to be aware that their rescue powers are limited. My smart friend added a corollary to his rule: “Be careful that the situation which you think can be solved with a life preserver doesn’t turn into one that really needs a Coast Guard cutter.”
The views of the author are not necessarily representative of those of Private Equity Real Estate magazine or its publisher PEI Media.
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