Panelists at the recent EisnerAmper Real Estate Private Equity Summit already had their answer ready for the “What LP Investors Want” session: diversification. That concept was not just limited to portfolios and property types, they told EisnerAmper tax partner Lisa Knee; but also to markets, the investors themselves, and all the way down to their proposals.
The panelist with perhaps the broadest digital-first approach — Jilliene Helman, founder and CEO of RealtyMogul.com — had the most immediate insight into the recent shifts in the dynamic between limited and general partnerships. She said that players who normally haven’t shown interest in the sub-$20 million transaction size are using crowdfunding to source the equity.
“These are major REITs and … historically all their equity would come from very large institutions. So it's interesting to see these large GPs go down a step in transaction size and source that equity,” she noted. She’s seeing skittishness in primary markets on the part of her investors, due to fear of “cash returns or lack thereof due to the tremendous amount of capital that's been flooding into primary markets for both institutional and international investors.”
Knee, who moderated the session, mentioned the emergence of secondary and tertiary U.S. markets after noting that Brooklyn had been deemed a primary market in an earlier panel. She asked Rodgers Harshbarger, director of investments at UNC Management Company, about his take on markets that are his company’s bread and butter.
Harshbarger used Raleigh, NC as a prime example of a secondary market with baby boomer and millennial appeal, noting, “It's all the things that you would look for in your Real Estate 101 class to invest in.”
“The problem is that it's just not very big in terms of the volume and transactions,” he added, though the temptation to invest in his specialty markets has increased. “Five or six years ago, whenever people came to our office from New York, it was to raise money. Now people come into our office and say, ‘we’d like some money, but we're here to look at deals, too.’” As glad as he is about that new scenario, it doesn't take a lot of money in these smaller markets to make significant impacts. |
Regarding the state of the market, Westport Capital Partners principal Sean Armstrong echoed a sentiment of cautiousness from the earlier “The Sky’s the Limit” panel.
“We're actually seeing a pretty wide divergence at the moment,” he said. “Probably the widest I've seen in my career, between public and private valuations and AVs. We're thinking about price information.” He rhetorically asked whether activity from the public markets can signal what will happen in the private markets, and that is the question Westport is trying to answer.
Despite the consensus of an eerily calm environment, condominiums have not been as affected, as Casey Kemper, president of Collegiate Asset Management, said that his group’s dealings on behalf of churches and religious organizations in that market are still very long, particularly in Manhattan.
“It's been hot. Fortunately or unfortunately for us, our projects will not be delivering products until 2020, perhaps 2021, and a lot can happen in the meantime. If there's a big blowout in Manhattan condos, it's certainly going to splash on us,” he said. He also noted that his clients have churches and surplus assets under financial stress, in which he sees the “value in the real estate that can be monetized. That's one of the big trends that we see and we're certainly involved in that trend and have partnered up on a couple of big development sites in Manhattan.”
A major aspect of business for Leah Zveglich, managing partner of Aster Family Advisors, is to foster community-based projects for her clients. She said Aster is at the early stages of working with clients from each continent, many whom come from different industries, for some ambitious undertakings, and it is certainly affecting the GP/LP dynamic.
“We're putting them together and including the next generation because usually younger generations’ tendencies are to be actively involved. They don't want to be passive investors. They also they really liked the global aspect of building a community,” she said, quipping that in 10 years, when the projects may complete, it may make an interesting case study.
At the session’s closing, a question from the audience inquired about how emerging managers with niche strategies can reach institutional investors. Helman and Zveglich made it clear that having a story proving you believe in the project is far more convincing than just showing up with data and statistics. Past success is not a guarantee of future performance and doesn’t dictate the future.
Perhaps would-be managers should binge-watch some “Mad Men” presentations in order to get the attention of major players like the panelists. It goes back to the basics of sales and being able to demonstrate your passion for the work and the plan, Zveglich explained. “That's more important than any of the numbers you give. Have the numbers ready but have something extra — something that will convince us as to why you should be a partner.”