What BentallGreenOak’s Metropolitan deal says about secondaries

The New York-based secondaries specialist’s trade from Carlyle to BGO highlights the benefits and risks involved with investing in the space.

Late last month, BentallGreenOak continued its march of expansion by acquiring Metropolitan Real Estate, the New York-based secondaries specialist, from The Carlyle Group.

In a statement, Sonny Kalsi, chief executive of BGO, framed the addition of the $2.4 billion multi-manager platform as an investor-focused move to add a new strategy to his firm’s $53 billion global real estate manager’s menu of equity and debt offerings. Sarah Schwarzschild and John So, co-heads of Metropolitan, called BGO a “strong strategic and cultural fit.”

Carlyle, meanwhile, declined to comment on the deal. The Washington, DC-based mega-manager acquired Metropolitan in 2013 using balance sheet capital, so the sale was not tied to a closed-end fund.

The transaction puts a spotlight on the evolving real estate secondaries space.

Hot market

Though still a small segment of the overall private real estate landscape, real estate-specific secondaries funds have been a magnet for capital in recent years, with 12 closing north of $1 billion since 2016. Before 2016, only two funds cleared that mark, according to PERE data. In 2020 alone, funds targeting the strategy closed on a total of $7.3 billion, the third biggest year on record after 2018 and 2016.

Metropolitan is one of eight groups to raise $1 billion or more for a single fund, joining fellow secondaries specialists StepStone Group and Landmark Partners, as well as diversified managers such as Blackstone – which has raised nearly $6 billion through its Strategic Partners platform since 2008 – and Goldman Sachs, which last year closed its second fund targeting the strategy on $2.75 billion, surpassing its $1.25 billion initial target.

New entrants have come to the space in the past year hoping to capitalize on this uptick in activity. In 2018, LaSalle Investment Management acquired London-based Aviva Investors. More recently, Brookfield Asset Management said last fall that it was evaluating roughly $13 billion of real estate secondaries as part of a pan-asset-class push into secondaries that could reach $50 billion. And, last month, Dallas-based Crow Holdings Capital hired Ira Shaw, a partner with Landmark, as a managing director, ostensibly to launch a secondaries platform.

Recaps take the lead

Capital deployment has similarly been on the rise, with the real estate secondaries market seeing a record $8.5 billion of transaction volume in 2020, according to a report from Landmark. But only $1 billion of that went to secondary market sales of investor interests in funds, the traditional staple of secondaries investment. Instead, the lion’s share of activity was around manager-led recapitalizations. Seven such transactions were valued at $250 million or more, including a portion of Blackstone’s $14.6 billion recap of BioMed Realty into an open-end fund.

Just last week, Brookfield recapitalized a $360 million portfolio of last-mile logistics assets owned by Boston-based NorthBridge Partners. As sister publication Secondaries Investor reported, the investment allowed NorthBridge to roll 21 assets from its NB Partners II fund into a continuation vehicle.

The influence of manager-led secondaries has been felt across asset types. The overall secondaries market – including buyout, venture, credit, infrastructure and real estate – consisted of a record 44 percent manager-led activity, according to a report from advisory firm Greenhill. That share has been on the rise since 2013.

“In private equity, the market has really taken off and now real estate is coasting in behind it, leveraging a lot of that same technology,” an advisory professional active in the space told PERE. “Recap have always been part of real estate, where you keep the operator and bring in new capital. Now, it’s just being applied in a closed-end fund format.”

While investing in recapitalizations, restructurings and spin-outs are designated components to Carlyle’s private equity-focused secondaries platform, AlpInvest, those strategies are not listed among Metropolitan’s primary areas of focus in Carlyle’s latest supplemental filing with the SEC. But Schwarzchild said recaps and non-traditional secondary investments are, in fact, parts of their strategy.

“Asset and structured secondaries have been part of Metropolitan’s strategy since Fund I, supported by our integrated platform and extensive manager network,” she in a written statement provided to PERE on Monday night. “It is a growing piece of the secondaries market, and now more than ever we are finding attractive opportunities to partner with strong managers on recapitalizations and structured transactions.”

Slow out the gate

Metropolitan’s MRE Secondaries Fund II, which closed on more than $1 billion in 2019, had only deployed $315 million as of December 2020, according to Carlyle’s supplemental filing with the SEC. Launched in 2017, that vehicle has a multiple on invested capital of 1.1x and a net internal rate of return disclosed as simply “neg.” Overall, the platform’s various investment vehicles have a cumulative multiple of 1.2x and a net IRR of 3 percent.

Schwarzchild said Metropolitan has since deployed 53 percent of the capital in its second fund and has another 14 percent under contract.

Secondaries platforms that sit within larger private market managers that invest directly can face unique challenges, a source familiar with the market told PERE, including internally imposed limitations to avoid conflicting with the investment strategies of their parent companies.

Also, other managers can be skeptical about allowing fund-of-fund investors into their funds when they are attached to competitors, even when the multi-manager group is walled off within the broader company.  The market source questioned whether a move from Carlyle to BGO would alleviate such a stigma for Metropolitan: “It’s hard for a manager to allow a group they’re competing with to enter as an LP,” he said. “If you’re the manager of the target fund, do you want BGO, essentially, getting all your reports or being on your advisory committee?”

Schwarzchild said Metropolitan has not had an issue with internal restrictions or external conflicts during its time with Carlyle. “Metropolitan’s secondary, primary and co-investment strategies are complementary to a direct real estate investment program, but do not overlap,” she said in a written statement. “Sitting within a larger organization has allowed us to leverage a broad platform, while protecting manager confidentiality through a best in class information barrier. We have been successfully operating this way since 2013.”

The opportunity for growth in real estate secondaries is clear, but success hinges on the ability to participate in manager-led transactions. For BGO, if Metropolitan is to be that entry point, the two entities will have a number of potential pitfalls to consider.