A real estate opportunity fund investor typically agrees to lock up his money for eight to ten years. If he wants to cash out sooner, he’s probably stuck. Historically, there has been no secondary market for his stake.
Liquid Realty Partners aims to change that. The year-old firm, launched by Scott Landress, the former global head of real estate investment banking at Bank of America, and Mark Berman, the founder of Trinad Partners, a private equity firm, is creating the beginnings of a secondary market for limited partnership interests in opportunity funds.
“It’s a new concept. Most investors are not aware that there is a secondary market for real estate partnerships,” says Bryon Sheets, a partner at Paul Capital Partners, a secondary private equity firm that has done business with Liquid Realty.
Liquid Realty expects to acquire between $100 million and $200 million in limited partnership stakes in ten to 20 funds over the next two years. While a few investment firms have dabbled in real estate secondaries as part of their overall strategy, Liquid Realty is the only firm that focuses exclusively on this market. “There are not a lot of people out there that do this,” says Terry Ahern, a pension fund consultant with Townsend Group.
Liquid Realty raised $30 million for its first fund, Liquid Realty Partners I, which is now fully invested after acquiring interests in five real estate opportunity funds. The $150 billion (total assets) universe of such funds seek out properties that appear undervalued. Landress and Berman are now raising their second fund, Liquid Realty Partners II.
How does Liquid Realty determine a price for a secondary share? Not surprisingly, Landress reveals few specifics on this sensitive issue. “We want to provide responsible pricing,” he says, though he also wants to make a solid return on his investment. “We could be buying at either a discount or a premium to net asset value.”
These days, of course, many property sectors are hurting. “We are very cognizant of the market weakness,” says Landress, noting that there is a chance that the properties will be worth less at the time the shares are sold than they were at the time the stake was purchased, allowing Liquid Realty to buy at a discount.
Liquid Realty typically buys out stakes in cash. The firm intends to hold on to its investments for the remaining life of the funds, but that strategy could, of course, change. Liquid Realty will make its gains as the fund’s managers realize net income, refinance debt on the portfolio or sell off assets.
Landress declines to identify specific funds or investors that Liquid Realty has worked with, but he does note that the firm targets funds that were launched in the mid- to late 1990s.
“These funds are typically fully invested,” Landress explains. “They are relatively mature, and their term life is usually half done.” Because Liquid Realty is making its investment four years into the life of the fund, say, with only four more years to go, it is assuming less risk.
While consultant Ahern and others appreciate the new liquidity in the secondary market, they emphasize that most institutional investors are comfortable with the illiquidity of their investments and are prepared to ride out market cycles. In other words, they’re less likely to sell out at fire-sale prices. “Most institutions aren’t compelled to sell,” Ahern notes.
