The still emerging secondary market for private equity funds is receiving a big boost from institutional investors looking to invest in hot new real estate areas and sell other less desirable parts of the sector.
“Secondary studies really come into their own. Covid has only accelerated growth, ”said Eric Adler, President and CEO of PGIM Real Estate. “Some investors want to stay in real estate, while others want to leave. Secondary products are becoming a good solution. “
In private markets, secondary trading allows investors to buy and sell shares of a fund at any time during the life of that fund, rather than being left in a vehicle intended for storage for ten or more years.
One state pension fund CIO said the push for a secondary real estate market comes under the headline “never miss a good crisis.”
“The real estate market is changing rapidly, but funds are by definition lagging,” he said. “It’s just the nature of the beast. There is a long way to develop property. “
Real estate is the main target for distribution of pensions, donations, insurance companies and other institutional investors. Most of these holdings are in private real estate funds that invest in long-planned projects and block investors’ money for a certain period of time. Real estate investment funds, which are traded on the open market and can be bought or sold at any time, represent a growing but still small percentage of assets. Both tend to be invested in different real estate sectors.
In the area of direct investment, the secondary market for fund shares has been growing since the global financial crisis. At the time, investors needed a way to access cash in private markets. Most secondary deals today are still carried out by private equity funds, with real estate, loans and other classes of private assets still in their infancy.
“Real estate funds have one of the longest tenure periods,” said Jay Cipriano, Managing Director of SEI’s Investment Management Division. “But the situation with LP is changing. The secondary market allows them to gain liquidity and more actively manage their portfolios, as well as re-prioritize their investment opportunities. ” He added that it’s not just about selling underperforming assets: investors can also try to maximize value by selling assets in a bull market like this.
In a recent poll, about half of all managers and investors told SEI that they will participate in the secondary market this year. By comparison, six years ago, when Cipriano said that only 28 percent of managers plan to buy or sell in secondary markets, and 38 percent of investors said the same.
For real estate investors, PGIM’s Adler said the biggest question mark looms over commercial office space, while sectors such as retail will have to re-evaluate prices before new investors can come in and renovate, such as suburban shopping centers. … At the same time, some places in the United States are becoming less attractive, while others are rapidly gaining popularity.
“Real estate was so attractive to institutional investors,” he said. “It seemed that some cities and buildings would have value forever. But we must not forget that these assets are utilitarian. After all, they must serve a public need. We have not experienced anything like Covid. Covid reminds us that real estate is more than just a financial instrument. It must match what is needed. If everyone wants to move south, it will have huge implications. ”
Meanwhile, the real estate sectors – including industry, biotechnology, life sciences and certain types of data centers that are used for cloud computing – are booming amid the pandemic, making these assets in short supply, Adler said. The secondary market allows GPs to buy out limited partners in order to preserve these types of assets, he said. As an example, Adler said that general practitioners could put together a unique portfolio of so-called last mile logistics centers that are difficult to rebuild given the lack of space near cities.
“Institutional investors cannot easily reclaim these assets, so secondary investments are great,” Adler said.