Global investment manager StepStone Real Estate and BVK (Bayerische Versorgungskammer), Germany's largest public pension group, are forming a €300m joint investment partnership to provide secondary liquidity to investors and managers of private real estate vehicles. The fund structure will be administered by fund service platform Universal-Investment-Luxembourg.
The Munich-based BVK, with more than €100bn of AUM, said the partnership will target secondaries in opportunistic, value-added and core-plus funds predominantly in the U.S. and Asia-Pacific.
BVK itself already has a strategic allocation to direct real estate of 4.5% and to real estate funds, including real estate investment trusts, of 24.3%.
About 45% of BVK's real estate investments are in Germany, with 33% of the fund's investments in office real estate, followed by 28% in residential real estate. North America represent 18.5%, Asia 9.9%, Australia 1.3% and South America 1.2% of its property holdings.
The pension fund has been active in private equity secondaries since 2018 and has been looking increasingly closely at the real estate secondaries market since.
This new €300m separate account will have a three-year investment period, but with the potential of adding on additional capital tranches. The investment program will be diversified by property sector, albeit with a heavy emphasis on office and industrial and logistics vehicles.
According to Manuel Philippe Wormer, BVK's head of global real estate investment management, “While BVK has historically been a predominantly direct property investor, and continues to do so, our indirect real estate platform offers an additional and flexible route of gaining exposure to real estate. In an efficient way, it offers further diversification and potential return enhancement by allowing us to access new markets, strategies and sectors.”
Looking beyond COVID, Wormer said that real estate secondaries is not just a pandemic-only opportunity. "We view secondaries as a permanent structural element of the global private real estate market and we expect to be long term participants," he said.
New York-headquartered StepStone, when aggregated with its most recent secondaries fund StepStone Real Estate Partners IV, will now have more than $1.5bn of unfunded commitments to invest in limited partner- and general partner-led real estate secondary opportunities.
Brendan MacDonald, StepStone's COO, said: "This partnership further expands our market leading position as a liquidity provider to real estate vehicles around the world by investing in funds, secondaries, recapitalizations and co-investments across the risk spectrum."
Noting how pandemic-related disruption has increased deal flow in the secondaries space, MacDonald said: “We think it is an interesting time to be investing in the real estate secondaries market. You’ve seen the pandemic interrupt and delay business plans for managers. GP-led secondary transactions can be caused by changes in business plans, where assets are going to have to be held longer than originally anticipated, and additional capital may be required in order to get those assets stabilised.”
StepStone's head of real estate Jeff Giller said that smaller firms with less fund-raising capacities than their bigger brothers can still access capital through the real estate secondaries market, despite a lot of investor capital shifting to the largest players.
REFIRE: Real estate secondary transactions are those where the investor buys interests in property portfolios or single assets from existing investors, often at a discount to the NAV. The investment often provides greater diversification by buying hundreds of assets.
There may also be less duration risk, as capital and profits are often returned sooner than by buying into the fund at inception, and there may be more core-like attributes to the assets as the value-added capex is typically injected at close to the beginning of the value creation strategy.
The result can be a significant cash-on-cash return on your equity, and a return profile more closely resembling a value-added strategy, but with a core-like property risk.