Transcript Slide 1
Real Estate Private Equity Market and Recapitalization and Secondaries Overview
16 th Annual Fischer Center Real Estate Conference May 20 2011
Jeffrey Giller Managing Partner and CIO Clairvue Capital Partners
THE UPCYCLE: The Rise Before The Fall
Moody’s Commercial Property Price Index (CPPI) Values Increase 90% 210 190 170 Peak 10/2007 + 90% 150 130 110 90 70 50 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
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THE UPCYCLE: Overabundant Equity
Global Real Estate Fundraising 2000 and 2010 72% of All Fund Equity Raised Between 2005 and 2008 120 100 80 60 40 20 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 80 60 40 20 0 200 180 160 140 120 100 Total Amount Raised (USD BN) Number of Funds Closed
Source: Private Equity Intelligence: Probitas Partners 3
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 4
THE UPCYCLE: Overabundant Debt
120 100 80 60 40 20 0 Change in Commercial Real Estate Debt Outstanding Half of the Total Volume Was Issued Between 2005 and 2007
Source: Mortgage Bankers Association, LaSalle Investment Management Note: Data Based on MBA Survey and not comprehensive total origination volume, but indicative of relative levels of activity over time 5
THE UPCYCLE: A Formula for Disaster
+
Over Abundant Equity Over Abundant Debt Skyrocketing Prices + Excessive Risk
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THE DOWNCYCLE: CRE Values Plummeted
Moody’s Commercial Property Price Index (CPPI) Values Fall 40% 210 190 170 150 130 110 90 70 50 2000 Peak 10/2007 8/2009 -40.6% from peak 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
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THE DOWNCYCLE: Access to Credit Abruptly Halted
Net Borrowing as % of GDP Irresponsible sub-prime lending led to a collapse in the housing market and a freeze in the global credit markets 35% 30% 25% 20% 15% 10% 5% 0% -5% 2001 2002 2003 2004 2005 2006 2007 2008 2009
Source: Moody’s Economy.com, Federal Reserve Board, LaSalle Investment Management 8
IN THE TROUGH: Recovery or Long, Flat Bottom?
Moody’s Commercial Property Price Index (CPPI) Values Hang at the Bottom 210 190 170 Peak 10/2007 150 130 110 90 70 Current (1/2011) -42.7% from peak 50 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
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ATTRIBUTES OF REAL ESTATE PE SECONDARIES J-Curve Effect Mitigation
Time
High Level of Specificity 100%
Secondaries
50%
Optimal Geography
Hyper-Diversification
Land, 5% Hotel, 10% Product Type Multi Family; 20% Office; 25% Retail; 30% Industrial, 20% Primaries
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SECONDARIES MARKET PARTICIPANTS The Sellers •
Public Pension Funds
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Corporate Pension Funds
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Endowments
•
Foundations
•
High New Worth Investors
•
Private Equity Investors
•
Corporations
Reasons For Sales •
Portfolio Rationalization
•
Reducing Manager Count
•
Denominator Effect
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P & L Management
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Balance Sheet Management
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Liquidity Constraints
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Exiting Troubled Funds
The Buyers •
Other Limited Partners
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Secondaires Funds
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Primary Funds of Funds
•
PE Secondaries Funds
SECONDARIES HAVE LITTLE OR NO VALUE IN A DOWNTURN
Change in NAV Relative to Change in GAV with 75% Leverage With a 40% Peak to Trough GAV Decline, Levered Equity Is Deeply Underwater Today 25 0% 20 15 10 5 0 -5 -10 0% -15 -20 -25 GAV Cummulative Rate of GAV Decline Leverage NAV Cummulative Rate of NAV Decline 25% 50% -20% -40% -60% -80% -100% -120% -140% -160% -180% -200% 100 0% 75% 25 95 5% 75% 20 90 10% 75% 15 85 15% 75% 10 80 20% 75% 5 75 25% 75% 0 70 30% 75% -5 65 35% 75% -10 60 40% 75% -15 55 45% 75% -20 50 50% 75% -25 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 13
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
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SECONDARIES VOLUME INCREASED IN THE DOWNTURN
1 800 1 600 1 400 1 200 1 000 800 600 400 200 0 1996 Real Estate Secondary Transaction Volume Beware of Falling Knives 1998 2000 2002 2004 2006 2008 2010 8 000 7 000 6 000 5 000 4 000 3 000 2 000 1 000 0 Annual Transaction Volume Cumulative Transaction Volume
Source: Landmark Partners, PERE 15
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) 16
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 17
THE DOWNCYCLE: CRE Delinquency Rates Spike
6% 5% 4% 3% 2% 1% 0% CRE Delinquency / Bank Chargeoffs Delinquencies Spike but Banks Slow to Foreclose– The Pain Has Yet To Be Felt Delinquencies
Source: American Council of Life Insurers, Federal Reserve, Real Point
Cumulative Chargeoffs + REO
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WHEN WILL THE REPE SECONDARY MARKET BECOME ROBUST?
Clairvue’s Valuations as a Percentage of Manager Reported NAV Managers are Becoming More Realistic 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Q2, 2010 Q3, 2010 Q4 , 2010 Q1, 2011
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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 20
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 21
THE NEED FOR REAL ESTATE RECAPITAZLIZATIONS
Offensive Uses
• Buying Back Debt At Discounts • Executing Value Added Business Plans • Making Opportunistic Acquisitions 22
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 23
Real Estate Private Equity Recapitalization and Secondaries Market Overview
Jeff Giller Managing Partner and Chief Investment Officer Clairvue Capital Partners EWMBA 284 University of California, Berkeley Haas School of Business April 28 , 2010