London-headquartered manager Pantheon’s decision to launch its real estate platform with a focus on secondaries investing is indicative of the potential growth of the sector amid growing institutional investor interest. PERE spoke to Roman Braslavsky, partner and head of Pantheon Real Estate, to understand the factors driving this optimism around real estate secondaries.
Pantheon believes the real estate secondaries market presents a $10 billion annual investing opportunity. That is quite a significant amount – what are the factors that helped you reach this forecast?
Roman Braslavsky: Secondaries market opportunities are a derivative of the capital raised in the primary fund market. During the period after the global financial crisis until the pandemic, about $1 trillion in private real estate capital was raised, which is twice the amount raised during the last bull market between the dot com crash and up until the GFC.
As more primary real estate private equity capital got raised, it naturally created more opportunities for secondaries, as it did in other alternatives like private equity and infrastructure. Real estate secondaries transaction volumes were reported to be around $9 billion in 2018 and 2019. That number fell off slightly to between $8 billion and $8.5 billion in 2020. That was mainly because 2020 was a unique time in the market; for a portion of 2020, transactions stood still due to the bid-ask spread and uncertainty.
If you normalize for 2020, and given the significant growth over the last decade in real estate secondaries, we think transaction volumes will continue to grow from pre-pandemic levels.
What has the pandemic done to the broader opportunity set for the secondaries market?
RB: The pandemic put certain business plans for real estate operators and sponsors on hold. That naturally pushed out the duration and timeline of the execution of certain business plans developed pre-pandemic, which do not align with the fund life of certain vehicles and the appetite to hold assets longer for certain investors. Putting aside some of the distress we are seeing, the market having to take a pause for 12-15 months in certain cases has naturally created more opportunities for secondaries capital to be put to work.
What type of secondaries investment strategies are the most appealing?
RB: GP-led deals are an area of the market we will be focused on. The balance between traditional LP stakes purchases within secondaries funds and GP-led deals has started to even out. About seven to eight years ago, 80 to 90 percent of all secondaries transactions consisted of buying LP stakes. Now that ratio between GP-led and LP stake deals is closer to 50 percent. We think that trend will continue, as sponsors are more proactive in trying to hold onto their best assets and trying to solve certain needs.
Speaking of investment opportunities, what sectors look the most promising in a post-pandemic world?
RB: What attracts us to the secondaries part of the investing market is that we do not need to see distress for us to find attractive deals and find solutions for GPs. There are dynamics at play across a number of different sectors. Some sectors are beaten up a little bit and others have been flourishing through the pandemic. The uncertainty around central business district offices and hospitality, for example, will provide more opportunities for secondaries capital as a solution.