Many investors view private equity as a long-term, illiquid investment. For the most part, core strategies are executed in seven- to ten-year windows. If private equity investors want to sell their positions before they mature, they turn to the secondaries market.

For the past two years, however, the secondaries market has not been an attractive option for sellers. The financial crisis of 2008 caused many private equity investors to suffer immense losses, which resulted in a huge number of distressed sellers entering the secondaries market. This, in turn, caused valuations and prices to tumble. Although private equity investors often sell their positions at a discount, these conditions were unprecedented. Unwilling to take such large losses, many investors decided to wait out the storm.

That, as we know, took longer than expected. By and large, investors used 2009 to recoup their investments. As a result, there was little activity in the secondaries market.

Today, however, as the economy shows signs of recovery, valuations have improved and many investors are once again looking at this market-not only to sell but also to buy.

In a recent study, 39 percent of investors said they anticipated increasing their allocations to secondaries funds over the next 12-18 months.1

This squares with BHA’s research data. Secondaries funds represented almost 25 percent of the total number of private equity mandates during the second quarter.

Secondaries funds are an important component of the private equity industry for managers and investors alike. Being able to liquidate positions helps many investors survive tumultuous times and it allows buy-side investors a chance for a profitable return. It is a good sign that this part of the private equity space is making a comeback.

1 AltAssets, “Investors bullish on private equity,” June 28,2010, http://www.altassets.com/private-equity-news/article/nz18544.html.

BHA’s recent conversations with several large institutional investors in the U.S. and Europe suggest that core real estate funds will be in high demand throughout the remainder of 2010. Whether looking to balance their portfolios or establish sector and geographic diversification, institutional investors are tracking the more stable real estate strategy inherent in core funds. When these investors will pull the trigger on new commitments is difficult to gauge, however, as some are waiting for the market to bottom out and others are waiting for more liquidity from existing investments.

An investment officer on the real estate team of a large state pension fund in the U.S. recently told BHA that the board has asked the team to switch gears and put more of an emphasis on core and core-plus real estate strategies. The pension fund has more than $1 billion in outstanding commitments to value-added and opportunistic investments, and its mandate over the next few years is to balance its portfolio by increasing investments in core funds. Still, the pension plan is in no rush to make new commitments as it believes the real estate market has yet to bottom out. When the firm begins to target more core investments in 2011, its focus will be on the U.S., as there are plenty of opportunities to take advantage of domestically.

A U.S. endowment based in the Mid-Atlantic region is looking to make new commitments toward the end of 2010 and beginning of 2011. It specifically mentioned an interest in industrial property, a market that it currently has no exposure to. Industrial real estate offers investors some cash flow stability due to the lease terms that are created and the low turnover rate. Tenants in industrial buildings tend to sign longer leases and vacate their buildings less frequently because of the high costs of transporting or moving their equipment. Even in this type of economic environment, tenant turnover remains relatively low, providing more stable returns for investors.

U.S.-focused core real estate investments are on the horizon for several European pension funds as well. In some cases, investors are focusing exclusively on this segment of the market. A corporate pension plan based in the Netherlands that has historically invested in European markets only is expanding its portfolio to include exposure to the U.S. market. This investor’s current search centers on core, unleveraged strategies as the investor is looking for the least amount of risk. The firm hopes to make one to two investments by the end of 2010.

What these institutions have in common is their belief that investment in real estate is essential to maintaining a strong portfolio, as it provides a return stream that is uncorrelated to equities and fixed income. Core strategies are especially popular at this time because some investors have found themselves overweight in value-added and opportunistic commitments. Additionally, the low level of risk is just what they are looking for when expanding into new regions and sectors of the real estate market.

Brazilian real estate is showing some promise for 2010. While the United States and Europe continue to face tight credit markets and declining real estate values, Brazil is emerging as a sound long-term investment opportunity.

The reason behind this is the overall stabilization of Brazil’s economy. After a long period of instability marked by soaring inflation Brazil took a step back and put into place more stringent fiscal policies to ensure that, moving forward, it would be able to grow and prosper regardless of outside influences. That this is working is evidenced by its low rate of inflation—less than 5 percent in 20091—and the fact that the recent credit crisis had little impact on Brazil. The country is in a good position for growth at a time when many more developed regions are still trying to recover.

Brazil’s increasing population, and its need for both residential and retail space, will act as a catalyst for significant growth. A Pricewaterhouse Coopers’ report recently noted that the growing Brazilian population, specifically the middle class, has increased the need for more housing. This coupled with the lack of retail shopping space will ultimately lead to an increase in development in these much needed areas.2

Another area where Brazil’s growing economy has created new demand is office space.3 Here, too, the growing need for expansion will create opportunities for developers and, in turn, investors.

Many indicators point to Brazil as a bright light among a more dreary global real estate outlook. Although it is still early in the year, BHA anticipates Brazil is a country that will attract investor interest.

1, 2 Pricewaterhouse Coopers, “Emerging Trends in Real Estate 2010.”

3 Business Monitor International, “Brazil Real Estate Report Q3 2009.”

All sectors of the real estate market suffered significantly due to the economic dismay of the past two years. Residential real estate, however, was one of the hardest hit and it has yet to rebound since the credit crunch has made it extremely difficult to obtain financing to buy or develop new housing. As we move into 2010, investors have mixed feelings about where residential real estate will head.

Some believe that the sector will experience another dip in the first half of the year mainly due to the ending of government programs that have been artificially ballooning demand. Rising mortgage rates could also cause a setback. According to CNBC, “Unless the government decides to extend its Fannie-Freddie purchase program or do something else to juice the credit markets, mortgage rates will rise steadily, probably leveling off somewhere around 6 percent.”1 If rates rise, it will be harder for many consumers to qualify for financing, further decreasing demand for residential properties.

On the flip side, some investors are of the opinion that recent increases in the number of home buyers viewing properties online as well as attendees at open houses indicate that the market has hit bottom and is on its way up.2 Investors that BHA analysts have spoken with seem to agree. During the past four weeks, investors have shown increased interest in the residential space. In total, more than 57 percent of real estate fund investors have expressed an interest in residential real estate funds—which shows a growing interest and a belief that there are opportunities in the residential space.

One such investor, a Boston-based consultant, is exclusively researching real estate funds of all strategies that are focused on residential properties. The firm believes that as the market rebounds the depressed pricing will lead to opportunities for larger returns.

Although real estate in general remains speculative moving into 2010 based on the credit crunch and stricter lending policies of various financial institutions, there is sentiment from professionals in the industry that real estate—and specifically residential real estate—is showing signs of recovery.

1 CNBC, “Predictions 2010: Real Estate,” December 1, 2009.

2 HamptonRoads.com, “U.S. residential real estate market is improving, expert says at lecture,” January 13, 2010.

As the New Year kicks off, many investors are focusing on real estate funds. Comparing the first fifteen days of January 2010 with the same period a year earlier, there has been almost four times the number of investors interested in the real estate sector.

An analysis of BHA mandates indicates that of the investors seeking real estate opportunities, more than 60 percent are looking at funds focused on the U.S. That same percentage of investors has set their sights on the commercial real estate sector. Although there are many reasons for this, it is partly due to the $1 trillion in U.S. commercial real estate loans that will mature between 2010 and 2013.1 As loans come due, managers looking to profit from distressed commercial properties will find many opportunities.

One such investor, an American wealth advisory firm with offices on the East Coast, recently expressed its interest in distressed real estate opportunities in the U.S. The firm believes that although illiquid, the risk/return profile for these types of funds makes them exceedingly attractive as long-term investments. Another investor, a California-based fund of real estate funds, is also seeking real estate funds focused on distressed opportunities in the U.S. However, the fund is looking for more exposure to the West Coast as it believes the margin of profit will be greater than that of investments on the East Coast.

Although 2010 is already proving to be an exciting year for all real estate funds, it is the commercial sector that is going to be the focal point of real estate fund managers and investors. Both will act on the uncertainty in the market and look to profit from the stress that the past few years have put on real estate as a whole.?

1 http://www.huffingtonpost.com/ … commercial-real-estate-de_n_205047.html.

As an asset class, real estate did not receive much investor attention in 2008 or the better part of 2009. As the real estate market starts to show signs of recovery, however, investors are beginning to add the asset class back into their portfolios and take advantage of the opportunities that fund managers can profit from.

During the past three months, BHA analysts have noticed a rise in investor interest in real estate. Much of this interest has come from wealth advisory firms. They made up 31 percent of the real estate mandates in the past three months. It seems that private investors are more apt to invest in longer-term investments than institutional investors.

For example, a U.S. wealth advisor that invests across all alternative asset classes still likes to have exposure to real estate. It is currently looking to build a network of managers for possible allocations. The firm was not allocating toward real estate funds last quarter and although it remains cautious it currently would like to take advantage of the opportunities the asset class is presenting.
International investors are also showing interest in real estate. A wealth advisor based out of Switzerland is always allocating and researching real estate funds. On an annual basis the firm allocates roughly $200 million to real estate funds. The firm is open to all strategies and focuses on the United States, Europe and emerging markets funds. It looks for managers who have raised at least three funds. The firm express its interest in real estate saying it offers low correlation, attractive yields, and stable payouts.

BHA analysts will continue to track investor interest in real estate, but for now it seems to be on the rise as investors begin to loosen their liquidity requirements. BHA expects this to be the trend into the new year.

As reported in the July 23, 2009, issue of Brighton House Associates Investor Monitor, BHA analysts noticed a spike in investor interest in real estate funds in mid-July. During the past week, analysts have identified a considerable amount of new interest, specifically towards real estate funds within the European investor community. Institutional and private investors alike are significantly increasing their exposure to real estate, with some raising their allocation targets from 5 percent last year to more than 20 percent currently.

Investors are searching for ways to lower risk and gain more stability in their portfolios-mainly to hedge against fluctuations in equity markets. Real estate, as indicated by European investor interest, seems to be an appropriate approach.

A wealth advisor based in Finland is currently evaluating value-add investments from European commercial property funds. The firm is focused on commercial property due to the wealth of opportunities that the economic crisis has generated. The firm invests primarily in European-focused funds, as well as a few funds focused on Asia or Russia. It will begin evaluating and investing in U.S. property funds throughout the next year.

A consultant based in Denmark is researching real estate funds to present to its pension fund clients toward the start of the fourth quarter. For some of these clients, it is their
first venture into real estate; it is a new focus after completing an internal review of their asset allocations during the past few quarters. The consufirm is focused on opportunities from all real estate investment strategies. It is beginning to look at real estate funds worldwide now that pension funds want to add globally diversified products.

As reported by Thao Hua on Pensions and Investments’ Web site, “…some European institutions are increasing their real estate investments. Among the investors diversifying and/or raising their allocations are the £34 billion ($55 billion) BT Pension Scheme, France’s €7 billion ($10 billion) French Public Service Additional Pension Scheme, Denmark’s e6.2 billion Doctors’ Pension Fund, the 24 billion Danish kroner ($4.5 billion) Danish Pension Fund for Engineers, Britain’s £1.8 billion Avon Pension Fund and the £550 million London Borough of Islington Pension Fund.” (For article click here).

BHA analysts continue to see a significant increase in interest in real estate funds from their network of European investors and expect the trend will carry on through the fall.

Throughout the first two quarters of 2009, BHA analysts took note that overwhelmingly, alternative investors were requiring favorable liquidity terms when considering new opportunities. As a result, their interest in real estate funds dropped considerably. During the past few weeks, however, BHA analysts have seen a significant increase in investor interest in the real estate sector and, specifically, commercial property.

Commercial property is being devastated by the global recession two fold. First, property values, which are directly affected by the state of the economy, have been dropping. Second, many commercial property owners are being forced to sell their holdings. Decreases in consumer spending are forcing countless stores to close-stores that commercial property owners rely on to pay their mortgages. As more and more stores shutter their operations, more and more commercial property owners are being forced to sell their properties at steep discounts to avoid the risk of foreclosure.

This dislocation in the real estate market has opened up extremely lucrative opportunities and investors are expressing interest. A large family office based in New York City is currently evaluating real estate funds with a focus on commercial distressed investments. The firm thinks that the commercial sector offers significant opportunity for real estate funds to buy up properties at a considerable discount. Additionally, a U.S. government pension plan articulated its interest in capitalizing on the noteworthy dislocation within commercial real estate caused by the downtown in both consumer spending and the overall economy.
Interest in real estate funds has significantly increased in recent weeks. Investors have taken notice of the precarious environment in which commercial real estate has found itself, and they are actively seeking managers that are able to successfully take advantage of this opportunity.

During the past couple of weeks, analysts at Brighton House Associates have noticed increased interest in commercial real estate funds. More than half of real estate investors interviewed were interested in funds focused on this property sector. Investors and fund managers alike are aware of the opportunities that exist in this sector, which are partly due to the Fed’s bailout of the mortgage market. The bailout has mortgage rates reaching their lowest in decades and has stimulated an increase in real estate purchases, which should continue to increase as the second quarter progresses.

One example of this trend comes from a large consultant based in Switzerland. The firm is currently looking for core, value add, and opportunistic real estate funds, specifically in the commercial and residential sectors. The firm is looking globally for opportunities with an interest in property funds focused on Switzerland, the U.S., Asia, and Europe.

Another good example comes from a consultant based in Ohio that works primarily with institutional clients. This consultant advises its clients on investments in real estate funds that focus on U.S. and European commercial property. The research process is ongoing and the firm is opportunistic in hearing from managers. The firm will consider all property sectors, but commercial property is of special interest right now as it feels this sector poses the best opportunities.

During the past year, the commercial real estate market has been tough, with many small businesses unable to obtain capital due to the credit crunch. Many small businesses have been forced to close their doors. Now that credit is expected to become more available to smaller firms, the commercial space should see a boost in purchases going forward.

The current interest in commercial real estate remains strong. In the last two weeks, 50 percent of real estate investors were interested in commercial real estate funds, which is up 10 percent from the week before. Investors are jumping at the chance to ride the upswing in the real estate market and feel the commercial space poses the greatest opportunity.

As with any financial investment, it is important to determine the correct entry period for real estate funds and there is never a distinct signal that tells investors when it is time to commit. Due to the time-intensive investment process and lack of liquidity associated with real estate funds, it is difficult to define a market bottom or top. Currently, the general sentiment is that the real estate market is at or near its lowest point. Many institutional investors recognize this as a potential opportunity for a worthwhile entry point, but they are still hesitant to make a commitment.

Speaking to hundreds of institutional investors on a weekly basis, a core group of analysts at BHA has recognized a noticeable uptick in demand for several real estate strategies. During our weekly investor interviews at the tail end of February and beginning of March, real estate fund investors emphasized their interest in managers that are utilizing core and core plus strategies. To be exact, 80 percent of the real estate investors analysts interviewed in the first week of March specified an interest in core plus strategies. This is a significant uptick from February, where 60 percent of interested real estate investors were looking at core plus strategies.
This past week, a large corporation headquartered in Illinois submitted an interesting mandate. While speaking with a BHA analyst, the director of portfolio management specifically mentioned an interest in hearing from both core and core plus funds that are focused on U.S. projects.
The director emphasized that $80 million of the fund’s assets are scheduled to be allocated throughout 2009. When asked about sector interests, the director said that the corporation is open to hearing from fund managers working in either the residential, commercial, or industrial sectors. The corporation expects to earn double-digit returns from such investments and plans on conducting at least three months of due diligence when evaluating potential funds.

This trend helps better outline the elusive window of real estate investment opportunity. BHA’s unique research methods give analysts the ability to capture in real time institutional investors’ sentiment and status. After capturing this data, analysts are better able to connect fund managers with potential investors using our proprietary lead matching technology.