Expiring Fund Lives Will Push Real Estate Into GP-Led Secondaries

What's New

Aging closed-end funds and debt maturities will force real estate owners into GP-led secondaries and recapitalizations. Margaret McKnight, Partner and Head of Portfolio Solutions at StepStone Real Estate, argues this in an interview on the InsuranceAUM.com Podcast. Brendan MacDonald, Partner and Chief Operating Officer at StepStone Real Estate, joins her. Fund marks remain above trading prices, so managers avoid selling. StepStone research counts more than $250 billion of net asset value in closed-end funds past their 10-year life. Patient investors should prepare to price recaps as those deadlines arrive.

Why It Matters

The trade has two willing sides. LPs want cash back so they can write new checks. GPs want to keep control and avoid booking losses. StepStone challenges the view that the debt wall ends in forced sales. Lenders have tended to extend and modify loans so far. StepStone's pipeline now shows owners seeking fresh equity to delever and refinance. StepStone raises capital for these deals and offers insurers SMAs, evergreen vehicles, and dedicated insurance funds.

By The Numbers

• 17%: Share of US loans that came due last year and were completely resolved, per McKnight.

• About half: Level of real estate fund distributions versus normal since 2022.

• 25%: Average loss on sales out of non-core funds last year.

• More than $1 trillion: Net asset value in real estate funds held for more than 5 years.

Memorable Quotes

• "Their marks are often quite a bit higher than where properties are trading. So, if they sell, they have to recognize a loss." McKnight names the valuation gap that keeps assets locked in old funds.

• "They're actually willing to pay a lot for that effectively through the structure of the deal because it keeps them from having to sell at a loss." She explains where the secondary buyer's return comes from.

• "They really can substantially grow their way out of the problem if only they could have more time." The deals depend on income growth arriving before the new runway ends.

• "There's room for alpha right now in probably what's going to be some very good vintage years." McKnight ties the reset to future returns for buyers who commit now.

The Wrap

Fund-life deadlines and refinancing needs must keep pushing managers toward recaps for the case to stay intact. It also needs GPs to keep paying for time through deal terms. It weakens if lenders keep extending loans and managers keep extending fund terms. It also weakens if income growth stalls and recapitalized assets stay overleveraged. The performance of the vintages funded over the next few years will settle it.