Fresh Wave Of Buyout Shops And Hedge Funds Set Sights On Real Estate

While those within the real estate sector worry about record high prices and when the end of the cycle will come, a new wave of private equity buyout specialists, hedge funds and bond investors are making moves to get into the sector.

Many of the biggest names in global real estate today — Blackstone, Brookfield, Carlyle — did not start out as real estate investors. They were private equity buyout specialists, or infrastructure investors, drawn to real estate by the potential profits.

In the 20 years or so since these giants entered the market, other buyout specialists, bond investors and hedge funds have followed their lead: think of Oaktree, PIMCO and KKR in the U.S., and EQT in Europe.

The next generation of these managers is now starting to set out their stalls to buy in the sector. 

In the new wave is U.S. hedge fund King Street Capital, which is raising $300M for a new real estate fund, according to Securities and Exchange Commission filings. It has been buying assets in markets still recovering from distress like Spain and Italy. York Capital has been pursuing a similar strategy in the past few years.

London based buyout firm BC Partners last year hired a real estate team that now numbers 11, and is raising €700M for its first real estate fund, according to Reuters.

And in Asia, private equity buyout giant Warburg Pincus has hired a real estate specialist to help it find more platforms to back in the region.

“There are two themes at work here,” Hodes Weill partner Will Rowson said. “Traditional private equity is more populated than it was, and investment managers want to offer a full service to their clients: Real estate is becoming a bigger part of the investment allocation of institutions and so managers want to provide that offer to them.

“Secondly, they’ve seen other PE managers and hedge funds make the move, and make good money in real estate: They’ve made good returns and hence promotes, so it is a strong business direction in that sense.”

A Hodes Weill report found that big institutions want to pile another $135B into real estate in order to meet their allocation targets.

“Since the financial crisis, a lot of alternative asset managers have been trying to diversify not away from their initial business, but into sectors that are close to it,” BC Partners head of real estate Stéphane Theuriau said.

BC Partners is a well-known name in private equity buyouts, with $24B of assets under management in the U.S. and Europe. Companies it has bought include restaurant chain Côte in the UK and retailer PetSmart in the U.S.

Last year it hired Theuriau, formerly of Morgan Stanley’s real estate investment business and French REIT Altarea Cogedim, to set up its new real estate platform.

“If you think of a firm like BC, it has been very successful in private equity, but it makes sense for it to have more than one product to sell. It went into credit, and now real estate. Real estate is an equity business, compared to private equity the multiples are typically lower but the internal rate of return is comparable.”

Theuriau argued that, while BC might be new to the sector, its background in private equity gives it an advantage over real estate specialists.

“It is great for me to be able to sit in our investment committee and hear what my colleagues investing in companies think about things,” he said. “Or I can call up CEOs in our tech or medical businesses and ask them how their sectors are changing. Real estate is a subsection of the economy, and you need an insight into that economy. I think being a stand-alone real estate investor right now is hard, given the way the world is being disrupted.”

Are firms like BC entering real estate at the wrong time, given record high prices in most asset classes across the globe?

“I think all of these firms are well aware that it is much harder to create higher value-add and opportunistic returns than it was five years ago,” Rowson said.

But BC Partners is optimistic about this timing.

“I’m not even sure you can talk about end of the cycle, given where interest rates are,” Theuriau said.

He added that the disruption being visited upon real estate as a result of technological and societal change is giving innovative investors a chance to make money through strategies that no longer depend on buying low and selling high.

He said BC will focus on deals that play to strong demographic trends, like residential assets in big European cities and repositioning office assets so they better appeal to corporate occupiers changing the way they work.

“Real estate is the only market where companies are very keen to copy what their rivals are doing, and so it has made itself a commodity,” he said. “The way we are working is changing: People don’t come in five days a week, and what we use the office for is different. That will massively change office real estate. There is no formula, but if you can create assets that appeal, they will command a premium. That disruption will be more important than the cycle.”