REAL ESTATE NEWS

Secondary recapitalizations have quietly moved from the edges of commercial real estate finance into the middle of the conversation. Once treated as a workaround for problem assets or tired funds, they are now a primary way to create liquidity and growth in a market defined by stubborn debt maturities, end-of-life vehicles and changing LP mandates.

Instead of signaling distress, these deals are increasingly where solid portfolios get refinanced, ownership is reshuffled and future pipelines are funded.

A Liquidity Tool For A Crowded Maturity Wall

The backdrop will be familiar to most institutional investors: a thick wall of loans coming due, closed-end funds that are bumping up against their stated terms and business plans that lost time during the pandemic. At the same time, many endowments, pensions and other institutions are changing CIOs, adjusting allocations or simply looking to show realizations before asking their own stakeholders for more capital.

That mix is driving more sponsors and LPs to the secondary market. CBRE recently devoted an episode of its "The Weekly Take" podcast to the topic, where host Spencer Levy sat down with Chris Reilly, managing partner and head of Real Estate Solutions Group at Brookfield Asset Management and Matt White, senior managing director in CBRE's Private Capital Advisory group, to unpack what they are seeing.

Reilly described the current environment as a convergence of pressures. There is a widely discussed wave of loan maturities. Funds are nearing the end of their tenures, with lingering Covid impacts and the rise in interest rates, which together have stretched timelines for executing business plans.

On top of that, he said, many pensions, endowments and universities are going through leadership and strategy changes, which often leads to portfolio reshuffles and a push to get capital back. In Reilly's words, it's a "confluence of factors" that is forcing GPs to find ways to return money while still protecting the value they have created.

From Corner Case To Core Strategy

Historically, many investors viewed secondaries as a niche corner of the market: a place where troubled vehicles were quietly traded or where LPs with liquidity needs sold down their positions. That perception is changing. Across private markets, secondary transactions have grown into a mainstream tool for portfolio management and real estate is following suit.

White drew a clear line between the traditional model of buying LP interests in funds and the GP-led recapitalizations that now occupy more of his time. In the older model, buyers stepped into an existing fund position with limited information and almost no say in asset-level decisions. In the newer one, they negotiate directly with the manager to recapitalize specific assets or portfolios into a fresh structure. The new capital effectively sets the price. Existing investors can either roll into the new vehicle or cash out.

Reilly said Brookfield has leaned into these asset-level "direct secondaries" and avoided the bulk purchases of LP fund interests that some other secondary players favor.

The reason is control and information. Brookfield wants to underwrite "lease by lease," he said, going through detailed financials and legal documents, rather than relying on a handful of reports and a periodic call with a fund manager. That preference also helps the firm avoid getting stuck with underperforming positions that come along with the better ones in large LP portfolios.

The broader industry is moving in the same direction. Continuation vehicles and GP-led transactions are now widely seen as a way to give good assets more time, allow GPs to finish their business plans and let LPs either de-risk or double down, depending on their needs. What used to be an edge case is increasingly part of the standard toolkit.

Recaps As A Way To Grow, Not Just Survive

One of the more interesting themes in the CBRE discussion is how sponsors are using recapitalizations today. These deals are not only about patching up old capital structures. They are also becoming an on-ramp to growth capital for managers who want to scale.

White walked through a pattern he sees often: A firm starts with friends-and-family money and small "country club" syndicates. As its track record improves, it attracts larger high-net-worth checks, maybe an endowment or two. At some point, though, that base gets tapped out. The investors want liquidity; otherwise, they are unable to support the manager's next phase. That is where an institutional recap can come in.

Reilly described a student housing operator that Brookfield recently backed. The company had built a six-asset portfolio. Brookfield recapitalized four of those assets into a new joint venture, taking roughly a low-90s equity stake and leaving a minority interest with the operator. The two remaining properties stayed outside the JV. The operator kept its role on the ground but gained something it did not have before: a deep-pocketed institutional partner for future deals.

In many of Brookfield's transactions, the recap is only the start. As Reilly explained, his group typically negotiates governance rights and exclusivity over the sponsor's forward pipeline. New deals are shown to Brookfield first, and the firm has the option to fund them. For the sponsor, that is a way to keep its best assets, provide liquidity to legacy investors and secure a repeat capital partner for the next stage of its strategy, all in one move.

The platform benefits are not just about equity. Large managers can bring lenders, purchasing power and internal expertise to the table. Reilly said Brookfield can often secure better loan terms because of the volume it does with a broad lender pool. Insurance costs can come down when properties are rolled onto a portfolio policy. In some cases, Brookfield's renewables arm can help add solar or other upgrades to improve operating margins.

White pointed out that this type of partnership also carries signaling value. A sponsor that has gone through a detailed underwriting process with a group like Brookfield and emerged with a joint venture in place can point to that relationship when it later seeks blind-pool commitments. For many LPs, that kind of "smart money" validation is a useful data point when they are sorting through managers.

A Market That Favors Discipline

None of this means the secondary market is easy. The capital targeting these deals generally aims for value-add outcomes, and not every asset or sector fits that profile at today's prices.

White said return expectations are the first filter. There has to be enough going-in yield and a credible path to NOI growth to get to mid-teens net returns. That is harder to achieve in segments that traded at very low cap rates during the last cycle.

Leverage is another dividing line. Reilly said that Brookfield keeps financing at roughly 60% loan-to-value at the asset level and does not add debt at the fund level. That stance reflects lessons from past downturns as well as the reality of current rates. In his view, over-leverage is what usually creates real problems. Modest leverage and borrower-friendly terms are how you stay in the game when the market turns.

Asset-level recaps also give buyers room to be selective. Instead of taking on entire fund portfolios, including underperforming or non-core positions, investors can focus on the assets that meet their underwriting standards and structure tailored solutions around them. In some situations, Reilly said, both GPs and LPs have already written off their original equity. Even then, if the GP is prepared to commit new capital and stay involved, a recapitalization with fresh money can give the real estate a second life.

Both Reilly and White expect secondary recapitalizations to remain central to the market over the next few years. White said he is cautiously optimistic that the significant amounts of capital raised for secondary strategies will help unclog the system by returning money to LPs, who can then recommit to new vehicles.

Reilly, for his part, pointed to ongoing macro volatility, a US financing market that is still functioning and a slow reset in owner expectations as loans come due at higher rates. All of those points lead to more situations where recapitalizations are the logical answer.

Source: GlobeSt/ALM