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Commercial real estate

Record Sums Raised for Real Estate Secondary Funds

Strategic Insights

— 2 min read

Investment firms are raising record sums for real estate secondary funds to buy assets from investors who are locked in due to their private nature. These funds allow investors to exit without selling their holdings at a loss, as prices for office buildings and commercial properties plummet. Goldman Sachs raised $3.4 billion for its Vintage Real Estate Partners III fund, the largest real estate secondary fund in Wall Street's history. Other firms, such as StepStone and Blackstone, are also raising significant amounts for their real estate secondary funds, exceeding their previous totals.

Key Takeaways:

  • Investment firms are raising record sums for real estate secondary funds, with Goldman Sachs' Vintage Real Estate Partners III fund raising $3.4 billion, the largest real estate secondary fund in Wall Street's history.
  • Private real estate funds hold an estimated $393 billion in net asset value, a 70% increase over the past five years, according to MSCI.
  • The average real estate secondary deal carried a 26% markdown on the asset's net value in the first half of 2024, according to Jefferies analysis.
  • Secondary funds offer a broader diversification across regions and property types compared to REITs and other more common investment vehicles, with StepStone's Jeffrey Giller noting that investors can skip the riskiest stage of real estate development.
  • Blackstone's Mark Burton emphasizes that the secondary strategy is not a distress play, with most instances providing liquidity to investors for assets that are actually doing well.
  • Sponsor-led deals have grown, while transactions directly with passive investors have been sluggish, partly due to fund managers' reluctance to reduce the stated worth of their assets.
  • The total transaction volume in the real estate secondary market stood at $9.8 billion last year, a sliver of the more than $100 billion that traded in the private equity secondary market.
  • Fund managers expect their transaction volume to increase this year, partly due to industry distress, with expectations that the Federal Reserve will start cutting rates later this year.

Statistics:

  • $393 billion: Estimated net asset value held by private real estate funds, a 70% increase over the past five years (MSCI).
  • 26%: Average markdown on the asset's net value in real estate secondary deals in the first half of 2024 (Jefferies analysis).
  • $9.8 billion: Total transaction volume in the real estate secondary market last year.
  • $100 billion: Total transaction volume in the private equity secondary market last year.
  • 15 years: Period during which commercial real estate loan interest rates were generally lower, exacerbating higher financing costs for many borrowers.

Sources:

  • MSCI
  • Jefferies
  • PitchBook
  • Ares
  • Goldman Sachs
  • StepStone
  • Blackstone
  • The New York Times

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