Hedge Funds - illiquid assets PE & Real Estate
anyone know if/how any of the big hedge funds are investing in illiquid assets like private equity and real estate?
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More private securities than anything else. It's perfect because there are rarely marks, but you can take incentive fees all the same.
interesting. this is an area that i'm trying to learn more about. in particular as it relates to real estate private equity, but also to private equity more generally (some aspects of finance can be transferred from one to the other).
i've read a little on it and have heard people discussing it, but would like to dig deeper. we had a hedge fund approach one of our vps to discuss investing in a deal that we had closed a month earlier. that made me wonder about the market for these securities.
Trying to keep this pithy (and I don't know enough to comment too much anyway, because my group doesn't work with HFs too often)...
Several big hedge funds are already involved with plain vanilla REIT stocks (probably the highest profile example right now is Farallon, which is Mills Corp's largest shareholder, and which is doing a JV with Simon Property Group to acquire Mills). Mills' issues, by the way, are arguably the biggest REIT story of 2006 (besides Equity Office)...take a look at news about them if you're interested.
Plenty of hedge funds are also becoming interested in more exotic parts of the capital structure--specifically thinking of convertible securities and CMBS (all the way from the AAA tranche to the equity tranche).
I don't think we've seen too many HFs get involved with hard assets--the illiquidity and long-term nature of the investment doesn't really mesh with most funds' profile. Hard assets are still the realm of the more traditional PE and institutional investors, and I'm not convinced that that's going to change any time soon. "Flipping" a property isn't that easy, nor is it a cost-effective way to do business.
What are they trying to achieve? To make a buck, like anyone else. Commercial real estate has had a great ride for the last 5 years (whether you're talking about hard assets or securities), and there's enough liquidity out there to keep it going in the near term. But a reasonable person can't take a look at the razor-thin credit spreads that we're seeing currently, and not be a little worried. To give an example, CMBS on a commercial office property that's 75% levered can now usually get a weighted average interest rate of US10Yr + 100 bps. That is absolutely absurd in my opinion (though to be fair, I've only been at this a couple of years), and when short term rates rise eventually, a lot of these things are going to default.
Then we'll see a correction, and that's when I'll back up the truck.
Sorry for the rambling answer. Don't have time to be thoughtful at the current moment.
^holy lord.
I was just searching the threads for info on this subject and I found this.... TireKicker was more right then he could have possibly known at the time...
Hats off, my friend.
There's a lot of very interesting zombie threads from right before the crash, someone should do a top Bear/Lehman/AIG/CDO insights of '07 compilation.
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