Real Estate Private Equity Market and Recapitalization and Secondaries Overview Jeffrey Giller...
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Transcript of Real Estate Private Equity Market and Recapitalization and Secondaries Overview Jeffrey Giller...
Real Estate Private Equity Market and Recapitalization and Secondaries Overview
Jeffrey GillerManaging Partner and CIOClairvue Capital Partners
16th Annual Fischer Center Real Estate ConferenceMay 20 2011
2
Peak 10/2007 + 90%
THE UPCYCLE: The Rise Before The Fall
Moody’s Commercial Property Price Index (CPPI)Values Increase 90%
3Source: Private Equity Intelligence: Probitas Partners
Global Real Estate Fundraising 2000 and 201072% of All Fund Equity Raised Between 2005 and 2008
THE UPCYCLE: Overabundant Equity
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THE UPCYCLE: Misalignment of Interests
Investors and Fund Managers Took Extraordinary Risks to Drive Volume:
•Institutional Investors Chasing Yields - Increased Allocations To REPE Funds
•Mega-sized Funds Emerged
•Fees Surpassed Carried-Interest As Source of Wealth For Managers
•Rapidly Committing Capital and Getting to the Next Fund Became the Manager’s Incentive
•Managers Began Taking More Risk In Order To Place Large Amounts of Capital
5Source: Mortgage Bankers Association, LaSalle Investment ManagementNote: Data Based on MBA Survey and not comprehensive total origination volume, but indicative of relative levels of activity over time
THE UPCYCLE: Overabundant Debt
Change in Commercial Real Estate Debt OutstandingHalf of the Total Volume Was Issued Between 2005 and 2007
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Over Abundant Equity
+ Over Abundant Debt
Skyrocketing Prices + Excessive Risk
THE UPCYCLE: A Formula for Disaster
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Peak 10/2007
THE DOWNCYCLE: CRE Values Plummeted
Moody’s Commercial Property Price Index (CPPI)Values Fall 40%
8/2009 -40.6% from peak
8Source: Moody’s Economy.com, Federal Reserve Board, LaSalle Investment Management
THE DOWNCYCLE: Access to Credit Abruptly Halted
Net Borrowing as % of GDPIrresponsible sub-prime lending led to a collapse in the housing market
and a freeze in the global credit markets
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IN THE TROUGH: Recovery or Long, Flat Bottom?
Moody’s Commercial Property Price Index (CPPI)Values Hang at the Bottom
Peak 10/2007
Current (1/2011) -42.7% from peak
ATTRIBUTES OF REAL ESTATE PE SECONDARIES
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50%
100%
Inve
sted
Cap
ital
Optimal
Time
High Level of SpecificityJ-Curve Effect Mitigation
Hyper-DiversificationGeography Product Type
Secondaries
Primaries
The Sellers Reasons For Sales The Buyers•Public Pension Funds
•Corporate Pension Funds
•Endowments
•Foundations
•High New Worth Investors
•Private Equity Investors
•Corporations
•Portfolio Rationalization
•Reducing Manager Count
•Denominator Effect
•P & L Management
•Balance Sheet Management
•Liquidity Constraints
•Exiting Troubled Funds
•Other Limited Partners
•Secondaires Funds
•Primary Funds of Funds
•PE Secondaries Funds
SECONDARIES MARKET PARTICIPANTS
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SECONDARIES HAVE LITTLE OR NO VALUE IN A DOWNTURN
Change in NAV Relative to Change in GAV with 75% LeverageWith a 40% Peak to Trough GAV Decline, Levered Equity Is Deeply Underwater Today
GAV 100 95 90 85 80 75 70 65 60 55 50Cummulative Rate of GAV Decline 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%Leverage 75% 75% 75% 75% 75% 75% 75% 75% 75% 75% 75%NAV 25 20 15 10 5 0 -5 -10 -15 -20 -25Cummulative Rate of NAV Decline 0% -20% -40% -60% -80% -100% -120% -140% -160% -180% -200%
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SECONDARIES HAVE LITTLE OR NO VALUE IN A DOWNTURN
Late Vintage Funds:•Overpaid for and overlevered their investments•25% property value decline wipes out 75% levered equity
Early Vintage Funds:•Remaining assets are often the weakest•Remaining assets may have been written-up and refinanced•Managers may be in the carry or catch-up phase
Low Levered Core Funds•Low yields require deep discounting to drive high target returns
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SECONDARIES VOLUME SHOULD SLOW IN A DOWNTURN
The Bid/Ask Gap: Reported NAVs are Higher Than Market NAVs:•Managers have a natural owners’ bias •Write-downs can drive loan to value debt covenant breaches•There was scant transaction activity to apply as benchmarks•Reluctance to highlight poor performance relative to competitors’•LPs may not pressure managers to highlight poor performance
Buyers are Conservative: Nobody is getting kudos for making new investments in this market and making mistakes can be career ending
Sellers feel they are better off holding an option than giving their interests away
15Source: Landmark Partners, PERE
SECONDARIES VOLUME INCREASED IN THE DOWNTURN
Real Estate Secondary Transaction VolumeBeware of Falling Knives
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WHO BOUGHT SECONDARIES DURING THE DOWTURN?
Secondaries Transactions Consummated:
LPs purchasing interests from other LPs
Inexperienced third party buyers
LPs driven by need for relief from future commitments selling at deep discounts (or paying buyers)
Fund , GP and LP recapitalizations (not true secondaries)
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WHEN WILL THE REPE SECONDARY MARKET BE ATTRACTIVE?
When the bid ask gap narrows. This will occur when:
When it becomes clear that the real estate market is moving toward recovery
Foreclosures and REO sales occur on a massive scale to re-set pricing to intrinsic levels
When the credit markets fully rebound
18Source: American Council of Life Insurers, Federal Reserve, Real Point
THE DOWNCYCLE: CRE Delinquency Rates Spike
CRE Delinquency / Bank ChargeoffsDelinquencies Spike but Banks Slow to Foreclose– The Pain Has Yet To Be Felt
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WHEN WILL THE REPE SECONDARY MARKET BECOME ROBUST?
Clairvue’s Valuations as a Percentage of Manager Reported NAVManagers are Becoming More Realistic
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THE NEED FOR REAL ESTATE RECAPITAZLIZATIONS
Background
72% of the $500b of REPE Fund Equity was raised between 1999 and 2008 - 50% of the $1 trillion in commercial mortgage debt outstanding was issued between 2005 and 2007: Assets are over-levered and face maturing debt Assets need capital to deal with maturing debt as well as for capex and operations But commitments to funds are either fully drawn or expired – LPs have little interest in investing more capital into troubled situations - credit is still difficult to obtain
21
THE NEED FOR REAL ESTATE RECAPITAZLIZATIONS
Defensive Needs
•Paying off maturing debt and funding equity gaps•Values have declined 40% to 50% and LTVs from 80% to 65%•$230 billion required to fund equity gap for the $1 trillion in maturing debt and $50 billion for the $125b REPE fund debt
•Paying Down Maturing Debt To Secure Term Extensions
•Covering Property and Fund-Level Carrying Costs
•Buying-out or Covering Obligations of Defaulting Partners
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THE NEED FOR REAL ESTATE RECAPITAZLIZATIONS
Offensive Uses
•Buying Back Debt At Discounts
•Executing Value Added Business Plans
•Making Opportunistic Acquisitions
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THE NEED FOR REAL ESTATE RECAPITAZLIZATIONS
Potential Sources of Capital
•Limited Partners Undrawn Commitments
•New Commitments From Limited Partners
•Traditional Lenders
•Liquidating Assets
•Third Party Specialists