Long-term private real estate funds represent an investment opportunity at a time when the sector continues to face fundraising challenges, according to a notice issued by investment firm Cliffwater.
US-based Cliffwater manages $50bn (£37.4bn) of assets across the alternatives platform and has committed more than $130bn in private alternatives since 2004.
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In a brief, the firm’s head of brokerage, Sean Brenan, and head of portfolio solutions, Phil Huber, argued that matured primaries offer many advantages associated with secondaries, including greater asset visibility, reduced blind pool risk, and default exposure.
Meanwhile, the older primaries maintain the long-term superiority of the primary commitment but also the opportunity to test the actual structures rather than the potential microphone.
“The basic ritual dedication is done before many goods are acquired,” Brenan and Huber explain. “Investors make big money because of the manager’s experience, track record, strategy, and investment pipeline. Long-term funds are different. At the time of commitment, many are already 30-50 percent leveraged.”
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Private equity fund raising has fallen sharply, nearly halving in two years, leaving even experienced managers often well short of their initial targets.
Cliffwater says the economic downturn reflects more than weak investor sentiment toward real estate. “Many providers remain bound by legacy exposure, limited distribution, and limited results, as developing commercial markets create new opportunities for managers. The result is a mismatch: attractive investments may be available, but the capital required to pursue them remains scarce.”
According to the company, this is where classic primaries come in, bridging the gap between traditional primary commitments and secondary investments.
“In that sense, one of today’s most compelling opportunities with secondary-like characteristics is technically not secondary at all,” added Brenan and Huber.
For older primaries to perform well, they often arise from long-term relationships and require significant underwriting of both the existing portfolio and the manager’s remaining investment plan. Successful implementation requires identifying strong practitioners from a large pool of potential investors, assessing the quality and sophistication of existing assets, and committing to the right location prior to the final closing of the fund.
While the return to fundraising remains difficult to predict, Brenan and Huber say that if money returns to the asset class, funds are likely to close quickly and opportunities to invest in old portfolios may diminish.
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