Real Estate Secondary Market Historic and Projected Transaction Volume

By: Paul Parker, Paul Mehlman and Andrew Holmberg

Over the course of the past year, Landmark has been approached by numerous investors and market participants asking about the true level of activity and opportunity to acquire real estate fund and partnership interests through the secondary market. The simple answer is that the dislocation, which has impacted the global economy and specifically the real estate sector, has stimulated activity in the real estate secondary market. However, to elaborate it is necessary to go beyond the market disorder and consider the significant growth of private real estate fund commitments made in recent years. It is the increased base of commitments to private real estate, in parallel with the current disorder, which has propelled the real estate secondary market to come of age. In this paper we will present Landmark’s data regarding historic transaction volume within the real estate secondary market. The data reflects the fact that transactions are happening in the current timeframe and that the market has been growing in parallel with the increasing base of private real estate fund commitments. We will also draw from our experience in the private equity secondary market to project how we see the real estate secondary market evolving by evaluating the level of recent historic commitments, or “inventory” of potential secondary transactions, which we believe will drive annual real estate secondary trading volume up to $1.5 billion to $3.0 billion per annum in the coming years. Landmark is seeing this play out in our pipeline, which as of August stands at more than $4 billion of potential acquisition opportunities.

Private Equity Portfolio Management: “Venture Capital: Hope is Not a Strategy”

By: Barry Griffiths, Ian Charles and Dirk Jonske

When investors decide how to allocate their capital among asset classes, they do so based in part on their risk and return expectations for each asset class.  In the wake of the Great Equity Meltdown of 2008, many investors are reassessing those expectations.  Nowhere is that process more difficult than with venture capital.  In the late 1980s and early 1990s, VC was viewed as a small, exotic, and risky opportunity.  During the tech boom of the late 1990s, VC was widely viewed as a surefire ticket to riches. Now, two stock-market crashes later, many investors are concerned about the anemic returns they have received from their VC investments over the past 10 years – Venture’s Lost Decade.  Is venture capital likely to continue its recent record of underperformance?

Through its secondary market investing, our firm, Landmark Partners, has been and continues to be a major investor in venture capital. Therefore we have a compelling interest in exploring venture’s performance potential. While many other venture investors just seem to be hoping for a general improvement in the overall venture marketplace, it seems to us that hope is not a strategy.  Instead, successful investing in venture capital requires a realistic understanding of patterns of risk and return. In this paper, we will outline some areas that we think venture investors need to understand. We draw some conclusions that are widely accepted and some that, quite frankly, are not.

Real Estate Portfolio Management: “The Denominator Dilemma”

By: Paul Parker, Paul Mehlman, Barry Griffiths and Andrew Holmberg

This white paper is based on an earlier Landmark paper that addresses similar questions in the private equity space. It serves as an extension of the earlier paper by focusing on liquidity constraints affecting private real estate portfolio commitments.

After the widespread drop in the financial markets in the second half of 2008, many real estate investors moved to the sidelines to evaluate their portfolios and reconsider their plans for future commitments. One reason for this is the so-called ‘denominator effect.’ The denominator effect arises when some fraction of a portfolio is allocated to each of several asset classes. If the total value of the portfolio (the denominator) declines at rate which exceeds the decline experienced in a particular asset class (the numerator), an investor may be become over-allocated to that particular asset class. For liquid asset classes, like tradable stocks and bonds, this situation is easily resolved by rebalancing the portfolio. For illiquid asset classes, like real estate, this kind of over-allocation is more difficult to resolve. For many investors, this was the situation in late 2008 and early 2009: tradable stocks and bonds widely declined in value, but the Net Asset Values (NAV) of illiquid holdings, did not drop as much. As a result, many institutional investors stopped making new real estate allocations.

Private Equity Portfolio Management: “The Denominator Dilemma”

By: Barry Griffiths, Ian Charles and Joseph Nasr

After the widespread drop in the financial markets in the second half of 2008, many private equity investors are being forced to reconsider their plans for future commitments to private equity.  One of the principal reasons for this is the so-called Denominator Effect.  The Denominator Effect arises when some fraction of a portfolio is allocated to each of several asset classes.  If the total value of the portfolio – the denominator of the fraction – goes down, then the amount invested in each class – the numerator – needs to decline as well to satisfy the asset allocation policy.

For liquid asset classes, like tradable stocks and bonds, this situation is easily resolved by rebalancing the portfolio.  For illiquid asset classes, like private equity, this kind of over-allocation is more difficult to resolve.  For many investors, this appears to be the situation in late 2008 and early 2009:  Tradable stocks and bonds have widely declined in value, but the Net Asset Values (NAV) of their private equity holdings do not appear to have dropped as much. Many investors therefore believe that they are now overcommitted to private equity and that they should refrain from making new commitments or dramatically reduce their future investment pace until their balances are back in line with their target allocation percentages.

In our view, this approach may be suboptimal for many investors, for at least three reasons.  First, we believe that the stated decline in private equity NAV through the end of the third quarter of 2008 does not fully reflect economic reality, and that in reality many investors actually may be under-committed to private equity.  Second, we believe that investors who do not make private equity commitments in the next year or two will be missing good buying opportunities.  Third, this approach is very disruptive to the skill base and relationships that are critical to a successful private equity program.