AMERICAS NEWS: Liquid goes large

San Francisco-based Liquid Realty is targeting $800 million for its fifth vehicle. If successful the fund would be the largest-ever private equity real estate secondaries fund. PERE June 2009

Fund managers have been eager to help their investors with liquidity pressures over the past few months.

As LPs struggled to balance the denominator effect against declining distributions, many GPs deferred capital calls and allowed limited partners to reduce fund commitments.

It was a case of listening to LP needs, general partners said, as well as maintaining key relationships for future fundraising efforts. For LPs, it offered them breathing space and the ability to avoid selling fund interests for heavily discounted prices.

GPs cannot delay capital calls indefinitely though. As fund managers eye future opportunities and continue to work through legacy assets, many – if not most – will soon be calling on unfunded commitments. LPs, in short, will soon need additional liquidity, and those without capital to spare will have to consider selling their assets.

Scott Landress

Secondaries players have been preparing themselves for such a market reaction, with San Francisco-based Liquid Realty Partners the latest to enter the market. The firm is believed to be preparing for the launch of its fifth vehicle, with a target of $800 million.

If successful, the fund would be the largest private equity real estate secondaries fund ever raised. In November, PERE reported that Simsbury, Connecticut-based Landmark Partners was also raising a private equity real estate secondaries fund, Landmark Real Estate Fund VI, targeting $750 million.

In December 2007, Liquid closed the industry's then-largest real estate secondaries fund, Liquid Realty Partners IV, on $572.3 million. LRP IV had originally targeted $400 million. Liquid declined to comment.

The latest fund is expected to follow a similar strategy to prior funds investing primarily in the US and Europe, particularly the UK. In 2006, Liquid closed one of largest secondaries deals ever when it bought a £435 million portfolio of property interests from Jersey Property Unit Trusts.

Founded in 2001, the firm is led by managing principals Scott Landress and Jeff Giller. Over the past year, Liquid has hired a raft of new executives including former Redwood Trust mortgage specialist John Arens, SL Green/Gramercy Capital executive John Graham and ex-JB Matteson Institutional Capital Partners executive Rein Gabrielsen.

At the time of Gabrielsen's appointment, Landress said Liquid had “increased its focus on portfolio management and driving performance”. But speaking to PERE magazine in December on growing interest in the secondaries market, Landress and Giller said many LPs were rebalancing their real estate portfolios in the wake of the credit crunch, paving the way for a much more active secondaries market in 2009 and 2010.

Industry professionals added that LPs were currently reluctant to accept steep discounts for fund interests, especially when unfunded commitments were not being called. “The market is still locked up,” said one executive. “LPs want to sell but are asking what they get out of a sale, if it doesn't generate the proceeds they need.”

As fund managers prepare for greater activity in the second half of 2009 and the start of 2010, cash-strapped LPs might have to seriously consider selling their interests in the secondaries market in a bid to get liquidity.