Episode 36

FEBRUARY 2, 2022

Sarah Schwarzschild on the expanded opportunity set in real estate

Sarah Schwarzschild, Managing Director and Co-Head of BGO Strategic Capital Partners at BentallGreenOak, discusses trends in the primary, secondary and co-investing real estate space.

Steve Peacher: Hi everybody, thanks again for dialing in to this episode of “Three in Five,” this is Steve Peacher of SLC Management and I’m really, really pleased to have with us today Sarah Schwarzschild, who's a managing director and co-head of BentallGreenOak strategic capital partners business, which is a business that joined BentallGreenOak almost a year ago, last March 2021. Sarah thanks for taking a few moments, out of what I know it's a busy day.

Sarah Schwarzschild: Thanks for having me, delighted to be here.

Steve Peacher: So your business invests in in other real estate funds - primary investments, secondary investments. Can we start by just you just, can you explain the kind of things that that you invest in on behalf of your clients?

Sarah Schwarzschild: Absolutely. BGO Strategic Capital Partners, which we call SCP for short, is a global, integrated multi manager platform. So, what does that mean? That means that we invest alongside other managers into real estate properties, and we do it on a global basis, across the U.S., across Europe and Asia Pacific, as well. And we have three main investment strategies. The first are what we call primaries and that's making commitments to close end fund vehicles managed by other real estate GPs. The second is co-investments and co-investments is where we're investing into a single property or a pool of properties alongside of a fund manager, but we're going directly into the real estate there. And the last is secondaries and secondaries is a very broad bucket of opportunities, some folks think of secondaries as what we would call traditional secondaries and that's buying a fund interest from another investor. But it also includes other investment types, such as GP lead transactions, which are recapitalizations, so it can either be recapitalizing a fund, it can be a pool of assets, or it can be a single asset type. But in any instance, we're investing alongside of another manager and we're real estate specialists, so we do this just in the real estate space.

Steve Peacher: So, the pandemic has had a big impact on real estate and in some cases that impact has been surprising, but its obviously offices have been sitting vacant, it's been great for industrial properties retail probably mixed. But it's certainly had an impact, so when you think of the type of investments you just described that you're making on behalf of your clients in the funds you manage, how have those fared through the pandemic, how these you know how these investments fared given that the underlying investments or commercial real estate?

Sarah Schwarzschild: I think we'll look back and see Covid in many instances as the great accelerator have some trends and we're seeing that in our space as well. Certainly on real estate secondaries the emerging trend of GP lead secondaries has been accelerated by the pandemic. Specifically, it's transforming the real estate secondary market from a market that was more transactional, more focused on traditional secondaries acquiring those LP fund stakes to one that is really broader and more solutions oriented. The real estate secondary market now has not just these traditional secondaries but the GP lead transactions that I was just mentioning recapitalizing an asset or a pool of assets or even an entire fund, and these are more solutions oriented rather than simply a transaction to acquire a fund stake. So, as we think about the market going forward from an investment standpoint, we think it really expands the opportunity set for real estate secondaries. There's about $700 billion of net asset value that are locked in closed and funds and that's a figure that we roughly calculated just using frequent data.1 We see less than 1%2 of that trading on the traditional secondary markets and GP lead secondaries unlock that net asset value that was only able to be accessed when those assets were stabilized and ready for sale. So, we think that it's actually expanding the market, not just the real estate secondary market but the real estate market in general and real estate secondary specifically taking a market that was $5 to $7 billion run rate closer to $10 or more in into the future.2

Steve Peacher: You know, as you highlight for those who don't follow the sector closely you wouldn't realize how much it's just exploded over the last few years, whether it's focused on private equity or real estate and maybe infrastructure is next. But it's really become a big segment of the market, what are some of the trends that you see going forward, especially in your space that's focused on real estate secondaries?

Sarah Schwarzschild: So some of the trends that we see, and I’ll speak to secondaries and I want to make sure I mentioned co-investments as well because we're also seeing trends there. But in secondaries is we are seeing a widespread adoption of the GP-led transactions. They were less than a third of the deals that were done in 2017 and now they're the majority of the transactions that were completed over the last two years. And so we're seeing that adoption from the sponsors viewing this as a tool to help manage their portfolios. We think that will continue to accelerate and be a really important part of the opportunity set for the real estate secondary space. In co-investments we're also seeing opportunity there. Fundraising has been challenging over the last couple of years for closed end funds, I think we can all agree Zoom fundraising is really hard, not being able to see people face to face and also more dollars are getting consolidated into bigger managers. At the same time, the wide array of real estate managers are seeing really interesting opportunities on the ground, and they want to be able to action their deal flow and if they don't have a fund that's raised to be able to do that or the deal is too big for where their fund is at the time, they're looking to capitalize those deals outside of their fund via co-invest. So our deal flow is up over 15% just based on this and I think our GP-centric model is driving further deal flow to our co-investment platform.

Steve Peacher: Well it's really interesting, and I know that at SLC but also at BentallGreenOak, we are so excited to have your business now in the fold and it's just going to get bigger and bigger as time goes on. Stepping away from this topic, I know you're I know you're super busy at work and you've got a bunch of kids at home, but somehow you find time to be really avid reader, so I think in this environment we could all use good book recommendation, so I wonder if you had a couple recommendations for those who are listening?

Sarah Schwarzschild: Absolutely I’m a voracious reader, I love to read, I read every day. So if you're listening, I’d also appreciate your recommendations, as well send them to me I’m always looking for them. Thinking about what I read recently I did go pretty deep into fantasy during the pandemic, it was a great escape. But as the flip side to that, one book I’d recommend if you want to understand the pandemic and zoonotic viruses is “Spillover,” it's absolutely fascinating. I also recently finished Sarah Winman’s “Still life,” it's epic fiction and I loved it. If you're looking for a book that's a little bit more fun, I would recommend “Becoming Duchess Goldblatt,” it's written by the anonymous person behind the Twitter account that has the same name. She is hysterical, it made me want to join Twitter just to get her tweets. And then if you have kids Harry Potter it's a classic but it's a wonderful series, we read all of the books with my oldest son and then right when we finished my younger two kids decided they wanted to hear them too, so we restarted and we're now on book five. But it's really a joy to read with them and it's amazing to be able to share my love of reading with my kids, too.

Steve Peacher: Okay, one quick follow on, do you like the to read books electronically, or you like to actually hold the book, the real the actual book?

Sarah Schwarzschild: I would have said to hold the book, however, I have gotten really attached to my Kindle for a couple of different reasons. One is that I travel a lot and I always want to have my Kindle on me to access that at all times, so it's just really easy to have a slim Kindle in your bag. And the second reason is just one of also practicality, I read so many books that I don't have a place for all the books, if I had to keep the physical one so I’m a Kindle advocate.

Steve Peacher: Well listen, I appreciate you taking the time I hope everybody's enjoyed that very interesting topic, and that was a great, sort of eclectic list of book recommendations, so I really like it. So, Sarah thanks for taking the time and thanks to everyone for listening and again to this session of put “Three in Five.”

Sarah Schwarzschild: Thank you for having me.


1 Preqin data, accessed August 25, 2021. More information available upon request.

2 Jefferies PCA. July 2021.

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