Recapitalizations are no longer a way for veteran real estate managers to move the odds and ends left over in their funds into new sidecar funds. Now, newer managers are increasingly spinning off majority stakes in their portfolios or individual properties to a growing number of secondary market managers.
Such deals can be a lifeline for newer managers, providing them with a big exit and an instant track record to use to raise a new fund. This option is especially welcomed by emerging real estate managers struggling to raise capital from asset owners that prefer to invest with managers they already know.
In the history of alternative investment secondary markets, there have been catalysts — such as the global financial crisis — that spurred the growth of these markets, said Sarah Schwarzschild, New York-based managing director and co-head of BGO Strategic Capital Partners, BentallGreenOak’s secondary real estate market business.
The pandemic increased some managers’ need for liquidity, she said. The ensuing uncertainty surrounding valuations also extended the time managers are holding properties, which means the funds that own those properties may be running out of capital, requiring an infusion of fresh funds to continue owning them, she said.
The financial crisis, for example, resulted in investors using limited partnership interest sales for portfolio management and for liquidity, Ms. Schwarzschild said.
The COVID-19 crisis will emerge as a catalyst in real estate, for GP-led transactions rather than for LP stakes, she said. GP-led transactions aren’t new, but until now, most of them involved recapitalizations of so-called tail-end funds, those at the end of their lives that held a few assets that needed to be sold, she explained.
“What we saw emerging in the past year or so was not just recapitalizations of funds but individual assets or pools of assets” as well as more structured transactions than in the past, Ms. Schwarzschild said. Joint ventures are also being recapitalized, she said.
“You can recapitalize anything. Recapitalization means inserting new capital into a structure,” Ms. Schwarzschild said.
In a recapitalization, the manager moves an entire portfolio or a selection of properties to a new fund, a joint venture or other vehicle in which the investors are a secondary market manager or a secondary market manager and limited partners.