According to Preqin, between 2003 and 2012, more than 300 real estate private equity funds have raised around $670 billion in institutional capital. Unfortunately, PE firms had earned the reputation of being the vultures of the financial world. While Private Equity firms have been portrayed as greedy irresponsible investors in the past, with changing times a new outlook on them may be necessary.
As the Real Estate market widens its opportunities for places to invest, different combinations of acquisitions are opening. Notes, Mortgages, Mezzanine Debt and Distressed Property purchases are just some of the buys PE firms are considering. At the same time, the strategy these firms adopt ranges from simply buying loans nearing foreclosure, to comprehensive partnering with the borrower and then buying the loan, which gives the PE firm access to all parties in the deal.
Some PE firms have been portrayed as Whites Knights in this enormous chessboard. For example, Savanna, in their acquisition of 80 Broad Street in Lower Manhattan, retained the original management in the building, while bailing out the partnership that owed millions. A different face of PE Firms was shown.
Although fundraising for PE Firms is up, finding opportunities of where to place their money might become more challenging. Prices for New York properties have gone up, making it difficult to make a decent return. On the other hand, new opportunities are evolving. Workouts and Liquidations in the CMBS Market have been growing over the last three years, and are forecasted to grow in 2012. It’s been said that, as Lenders improve their balance sheet, they are more willing to deal with the bad loans on their books, something they were unable or willing to do three years ago. Also, there is a huge amount of loans maturing this in the next few years where valuations will be an issue. This will create even more opportunity for PE firms.
It will be interesting to see whether PE firms will play the role of villain or knight going forward in the real estate world.