Kevin Gannon is on the stage, pacing and speaking loudly through the amplification system, as if using the power of his oratory to raise the roof of the resort ballroom, to create more room for himself and the Star Wars financial numbers he has come to present. The presentation slides tell the tale of private assets growing ability to attract major investment managers and investor commitments.
One member of the audience leans to another and says that Gannon’s firm, Robert A. Stanger & Co., is “the Morningstar of private wealth.”
Indeed, he and his team at Stanger assiduously track and report the numbers for nonlisted REITs, BDCs, interval funds, opportunity zones, DSTs, etc.
Gannon is the firm’s chairman and CEO and is always one of the most anticipated and energetic acts during IPA and ADISA conferences. He’s a regular. Most recently he presented at the IPAVision conference in Dallas in September, then the ADISA fall conference in Las Vegas in October.
Though private assets have seen better times, Gannon underscores the positive and highlights the indicators of even greater times to come in the burgeoning business for private-market investments. Real Assets Adviser editor Mike Consol asked Gannon to summarize some of his findings.
During your presentations at the IPAVision and ADISA conferences you cited several “wow” factors in the private alternatives space. One of those “wow” factors was the fulfillment of $30 billion in investor redemptions. Elaborate on the import of this.
Never in the history of alternative investment securities has the industry been able to provide liquidity at the election of investors at a level like this. By Stanger estimates, we believe that NAV REITs will honor more than $20 billion of redemption requests, while NAV BDCs and interval funds each provide more than $5 billion of liquidity each this year. This relatively new generation of alternatives structured with liquidity of 2 percent of NAV per month and up to 5 percent of NAV per quarter has lived up to its commitments and further legitimizes the structure and demonstrates the integrity of the alternative investment space and provides the space with a refreshed capital source for creative sponsors of other alternative investments including those focusing on interval funds, NAV BDCs, infrastructure, private equity, private credit, student housing, self-storage, industrial and NAV REITs.
You also emphasized the migration to private placement structures. Talk about the nature of the private placements being favored by product sponsors and investors.
Among the reasons for the migration by sponsors to private placement structures in the alternative investment space is simplification of the process due to the elimination of state and federal regulatory review, a factor that substantially reduces the costs of the offering. Additionally, another benefit to the private placement structure is the general elimination of investment concentration limitations imposed on these investments by regulators and selling group members where accredited investors are sometimes required to limit alternative investments to 10 percent or less of liquid net worth. The elimination of this encumbrance could easily double the level of fundraising in the alternative investment space in the next few years.
Private credit has bloomed. You spoke of the emergence of high-yield credit investments. How rich are those opportunities?
We are now seeing yields of 8 percent to 11 percent or more on variable-rate private credit investments indexed to SOFR. Now is a good time to investigate these opportunities with a chance to double the yield from safer investment categories like CDs and treasury securities. Obviously, these securities will involve a higher degree of risk. We expect that high-yield alternative investment securities like BDCs, NAV mortgage REITs, credit interval funds will see substantial upswings in capital formation for the rest of 2023 and 2024.
Both 1031 and 721 transactions are experiencing increased acceptance, according to the data your organization collects. What’s the buzz there?
Investors holding appreciated real estate assets can sell them and complete a Section 1031 Exchange for a DST property that is sought after by a sponsor that also has an affiliated NAV REIT. The NAV REIT can exchange operating partnership units of the NAV REIT for the equity in the DST, after a one- to two-year waiting period, providing the investor who originally swapped his real estate for the DST interest with an interest in a diversified operating partnership that could later be redeemed under the redemption provisions of the NAV REIT. This is a great estate planning and diversification strategy. Investors can move some illiquid real estate holdings into an exchange with a DST then into the OP units of a partnership affiliated with an NAV REIT that has a redemption provision that entitles the investor to receive cash for his interest. This structure allows investors to put their family in a position to monetize these holdings upon the death of the investor. In my view this is a great estate planning device.
Investors have an appetite for the massive investments needed in domestic and global infrastructure. You have cited the introduction of infrastructure programs. Give us a sketch, please.
Infrastructure assets have gained in popularity over the past few years with some of the most significant players in the arena bringing REIT, operating company and interval funds to the table focused on infrastructure. Among the players are KKR, Brookfield, Apollo, and Cantor Fitzgerald. We believe that infrastructure investments will continue a substantial upward swing in capital formation in the alternative investment space over the next 24 months. Infrastructure investments have solid earnings and growth potential.
You used the adjective “extraordinary” to describe the innovations made in creating liquidity. What are the specifics?
Two of the most substantial innovations involve Blackstone and Blackstone Real Estate Income Trust (BREIT). In the first instance, Blackstone received a $4.5 billion investment from the University of California that was deployed into a joint venture with Blackstone then invested in BREIT I-Shares. The UC investment was supported by $1.1 billion of stock in BREIT held by Blackstone that provides additional collateral for the investment that targets an 11.25 percent return from the joint venture. This is clearly the case of Blackstone standing behind the NAV of BREIT with $1.1 billion. In the second BREIT transaction, BREIT created a joint venture with the publicly traded Realty Income Corp. for $950 million. Realty Income now owns a common and preferred interest in the Bellagio Hotel in Las Vegas. Together these two transactions provided BREIT with approximately $5.5 billion of liquidity to support the redemption activity within BREIT in 2023.
Finally, you have tracked a proliferation of new sponsors. What’s motivating this parade and who are some of the major players that have recently stepped up?
These sponsors have observed that more than $103 billion was raised in the retail Alternative Investment space in 2022 with products that have demonstrated great financial integrity in terms of valuation transparency and liquidity with the expectation that the Alternative Investment landscape will continue to expand. Among the new sponsors are BGO Industrial Trust, PGIM, Apollo, KKR, Ares, Brookfield, Fortress, Goldman Sachs, Invesco, Cohen & Steers, and Crescent. We expect to see over 100 new entrants to the alternative investment space in 2023 and more in 2024.