10.05.2011
By Terry Flanagan

Private Equity: Risk Averse?

Perhaps deemed among the most risky investors, even private equity real estate investors are deleveraging.

Some market observers may see investor uncertainty in every nook and cranny of the financial markets. Even investors, historically untouched by day-to-day volatility are now feeling the effects of a broad-based security selloff, a slumping economy and the bleak prospects of a low yield world.

Private equity firms are feeling those ill-effects—specifically those that invest in private real estate, which to some, may not be a shock giving a weak housing market stalling the global recovery.

“It’s been tail of two markets: the yield and the distressed,” said Stephen Coyle, chief investment officer of global realty partners, the private equity portfolio management group at real-estate investment firm, Cohen & Steers.

“It’s a low growth world, but also one of low interest rates. There is a huge hunger for yield, with treasuries hovering around two percent…it’s pushed down cap rates.”

Capitalization or “cap” rate is the ratio between the net operating income produced by an asset and its original price. For real estate investors, the cap rate signals the current market value.

Thus, the sell-off seen in the everyday stock market has even now come to the illiquid, opaque real estate market. Coyle noted a sizeable sell off and liquidation activity in commercial mortgage backed securities (CMBS) last year, at 8 billion units industry-wide.

“The distressed side is getting worse,” Coyle said, citing macroeconomic data on a struggling housing market of foreclosures and bankruptcies. Yet, distressed property comprises the bulk of inventory for private equity real estate investors.

“The last three months have given us a pause purely from the acquisition point of view. Everything we purchase is distressed, directly purchased from lenders—that was the focus of our activity,” said Jeff Quicksilver, managing principal at Walton Street Capital, a sponsor of a series of performance based, private equity real estate investment funds.

Yet while the broad based economy spells a bleak picture for real estate—mainly due to fearful sentiment from retail investors, and blasé attitudes from high net worth individuals, according to Quicksilver, there are deals to be made on “the micro level.”

“From a macro perspective, I can’t say that we have a lot of confidence about where the economy is headed but I would say the constant theme is looking for micro opportunities,” said Sush Torgalkar, chief operating officer of Westbrook Partners, a privately-owned, real estate investment management company.

As of late, the firm has conducted deals predominately in the U.S. and entirely comprised of debt, Torgalkar said.

“The key theme is that it’s been unlevered. We want to have confidence even when there’s hiccups,” he said—echoing painful lessons learned from the days leading up to the housing bubble burst in 2008.

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