One investor's liquidity trap is another's opportunity.
18 months ago, StepStone Group said a rare opportunity was emerging in this nascent corner of the capital markets. The firm is winding down fundraising for its secondaries fund which has already outpaced its prior fund by $1B.
A quick primer on the space...
What are real estate secondaries?
Real estate secondaries refer to the buying and selling of existing investor interests in private real estate funds, joint ventures, or direct property holdings, rather than investing in new primary fund commitments.
Why do real estate secondaries exist?
They exist to provide liquidity to investors who need to exit private real estate investments before the fund's natural end. They also help funds and managers optimize their portfolios by adjusting investor compositions.
Who buys real estate secondaries?
Institutional investors, secondary funds, pension funds, and private equity firms buy secondaries to gain access to real estate investments at a discount, mitigate blind pool risk, and accelerate deployment.
When are real estate secondaries compelling?
They are most compelling when assets are undervalued, market dislocations create liquidity needs, or when buying at a discount to net asset value (NAV) offers attractive risk-adjusted returns.
What types of real estate secondaries exist?
-- LP interest sales: Limited partners (LPs) sell stakes in private real estate funds.
-- GP-led secondaries: General partners (GPs) restructure or extend fund lifespans via continuation vehicles.
-- Direct secondaries: Sales of individual real estate assets outside of fund structures.
How are real estate secondaries priced?
Pricing is based on NAV, discounted cash flow analysis, market conditions, and the urgency of the seller's liquidity needs. Discounts typically range from 5% to 30% but can be deeper in distressed markets.
How do real estate secondaries compare to direct real estate investments?
Secondaries offer quicker exposure with known assets. They generally have shorter holding periods. They may be available at a discount compared to direct acquisitions.
How have real estate secondaries evolved?
Initially niche, the market has grown significantly, with more secondary-specific funds, increasing transaction volumes, and greater transparency in pricing. GP-led deals have also become more common.
What market conditions favor real estate secondaries?
-- Rising interest rates: More forced sellers looking for liquidity.
-- Market downturns: Buyers can acquire assets below NAV.
-- Maturing fund cycles: LPs seek exits from long-term commitments.
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