When Blackstone moves in a new direction, there is tyically an opportunity to be had. Last year, it acquired Strategic Partners, a company that specialises in the secondary market for limited partnership (LP) interests in private equity funds.
The firm also ramped up its focus on real estate secondary investing this summer with the addition of Mark Burton as principal.
According to a source close to Blackstone, it expects the ‘secondaries’ market to double over the next few years – and real estate is expected to play a major part in that expansion.
Secondary private equity is a niche, inefficient market where current transaction volume represents less than 2% of global private equity exposure, according to Blackstone. The firm estimates that the potential supply of saleable LP interests that have not been realised is between $1.5trn and $2.5trn. Strategic Partners expects transaction volume could reach 4% of global exposure over the next several years, which would result in between $60bn to $80bn of secondary trading, up from $30bn to $40bn today.
Strategic Partners identified real estate as a growth opportunity at Blackstone’s mid-year Investor Day in June. The firm believes the development of a secondary market in real estate LP interests is five years behind mainline private equity, and it is moving rapidly to win its share of the business.
Burton, who is the first professional at Strategic Partners to be dedicated entirely to real estate, joins from commercial real estate credit manager H/2 Capital Partners, with previous experience overseeing domestic commercial real estate investing and lending at Goldman Sachs’ Special Situations Group. He will lead deployment of the $211m Strategic Partners Fund V RE, Blackstone’s fourth dedicated real estate secondary fund since its first in 2003.
Burton’s move from H/2 – known for innovative transactions such as the combination earlier this year of commercial-mortgage bonds and junk-rated bank loans into a single securitisation – prompted speculation that Strategic Partners might migrate towards securitisation or other techniques to develop its real estate secondary business.
Nothing could be more off the mark, the source told IP Real Estate. The secondary unit will remain focused on buying performing real estate assets and holding them for their remaining terms. Part of the firm’s interest in the sector at this time is that many investors in real estate private equity between 2005 and 2008 ended up getting hurt in the financial crisis, and there is a significant amount of interest in adjusting or restructuring holdings from that period, the source said.
Burton will spearhead deployment of the final tranches of Fund V RE, which is already significantly invested. In 2013, Fund V RE posted a 35% net IRR and a multiple of invested capital of 1.4x. The plan is to launch a sixth real estate secondary fund, although the source would not provide a timeframe.
Strategic Partners’ core proposition is that properly executed secondary investing provides several advantages relative to ‘primary’ investing. The three most important are: reduction of the blind-pool risk that exists between a fund closing to new subscriptions and it becoming fully invested; a speedier return of capital; reduced costs through buying interests at discounts to net asset value.
While those appear to be straightforward factors any secondaries specialist could offer, analysts say Strategic Partners’ edge is that it has built a business with a cohesive investment team, a deep database of completed transactions, and Blackstone’s network of relationships with more than 1,500 institutional limited partners and – more recently – family offices and high-net-worth advisers.
This has positioned the firm as a provider of liquidity to investors at a time when other sources are shrinking. In a report on Blackstone’s Investor Day, Goldman Sachs said one of Blackstone’s strategic advantages was the “ability to innovate and leverage its brand for new products,” and private equity secondaries are a prime example. “Financial regulatory reform is also an opportunity for Strategic Partners as banks reduce illiquid portfolios on their balance sheets,” Goldman said.