Equity Recapitalizations Are Giving Sponsors A Second Ownership Life, If They Can Find the Right Capital Partner
Renewed interest in equity recapitalizations is emerging as sponsors across the country find themselves facing a similar dilemma: While existing capital partners are ready to exit after full or partial execution of the original business plan, many sponsors still see the potential to realize significant returns and have a vested interest in owning their properties long term, (especially with investors that have a lower cost of capital than their current partners).
To get the best of both worlds, sponsors are increasingly seeking to buy out their existing partners through equity recapitalizations.
“To start, the two initial hurdles a sponsor will face in a recapitalization transaction are determining/negotiating an appropriate recap price and expeditiously finding the right capital partner,” said Adam L. Steinberg, Principal and co-head of Ackman-Ziff’s Equity Practice.
Many sponsors utilize capital advisers like Ackman-Ziff to help them secure strategic equity partners and structure these favorable yet complex transactions within firm time frames.
“In addition to the benefit of continued fee streams, sponsors have developed strong ownership histories with these assets, and they see the potential for additional value creation opportunities, not to mention the tax benefits of continued ownership as well as maintaining market share, company infrastructure and future option value,” said Steinberg, who has closed numerous equity recaps in his 15 years at the firm.
“We’re seeing increased investor appetite for these types of transactions,” said Patrick Hanlon, Principal and co-head of Ackman-Ziff’s Equity Practice. "Recapitalizations can provide equity investors with an intriguing entry point relative to broadly marketed acquisitions."
The fixed prices, experienced operating partners and often accretive long-term, in-place debt make “off-market” recapitalizations increasingly attractive to investors. But not all recap opportunities are created equal.
Equity investors are looking for a recap price that offers a discount to market value, especially in the core/core-plus space, to allow room to provide promotes and fees to the sponsor.
“All things being equal, equity investors would rather work with an operator that has developed a history and working knowledge of the asset,” said Hanlon. “Investors always have the option to buy a broadly marketed asset at a full market price and hire a third-party, fee-only manager.”
“There’s no specific formula for these placements,” said Simon Ziff, President of Ackman-Ziff. “Unlike debt markets, where lenders are more likely to be volume-driven, the ‘planets must align’ for equity investors. Equity investors target certain criteria — specific markets, investment horizon, business plan, investment amount, sponsor track record — and focus on allocation and diversification relative to their other investments.”
To achieve the best result, Ackman-Ziff conducts comprehensive due diligence on both the sponsorship and the investment opportunity, creates a compelling investment memorandum and then simultaneously markets to the appropriate investment professional at “high probability” investment groups, which have been selected based on their desire for a particular property type, location, investment style, and investment amount as well as other special criteria that may be important to the sponsor, such as long-term ownership or 49% passive equity. Ackman-Ziff’s equity team, most of whom have extensive experience on the principal-investor side, has spent years building personal relationships across the industry and has developed a comprehensive knowledge of investors.
“It’s essential to underwrite and present these recap opportunities strategically to the right investor groups,” cautioned Steinberg. In working with a broad range of equity capital sources including family offices, high net worth investors, pension funds, insurance companies, investment advisors, sovereign or foreign groups and private equity funds, Ackman-Ziff develops a methodical, selective marketing plan and is often able to create a competitive environment effectively lowering the cost of capital and improving other business terms.
“If your existing capital partner is looking to exit, and you don’t already have a bird-in-the-hand investor, seriously consider hiring an advisor to conduct a comprehensive process and find the right recap partner,” said Steinberg. “With the short timeline on these recaps, you don’t have the luxury of spending two to four weeks with your best six to 12 relationships and then, if unable to secure a new partner, have an advisor start and run a thorough and successful process.”
This feature was produced by Bisnow Branded Content in collaboration with Ackman-Ziff. Bisnow news staff was not involved in the production of this content.