Real Estate Secondaries: Opportunities for Insurers in Evolving Markets

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Stewart: Hey, welcome back. We're so happy to have you. And I want to say thanks so much for a lot of the kind words and things that I hear when I'm out and about. It's really kind what people have to say, and I appreciate that a lot of folks are using these podcasts to learn. That's certainly our goal. And so just with that as a backdrop, most of you know, but my name's Stewart Foley. This is the insuranceAUM.com podcast, and we are the home of the world's smartest money. My title today is Founder and Senior Advisor to InsuranceAUM.com, which is now proudly affiliated with The Institutes. We are thrilled with that. InsuranceAUM is an educational nonprofit, and we are dedicated to educating the insurance investment community. And today I'm super excited about this one because we are talking about real estate secondaries, and I think this is the first time we've done it. And our guests are from Ares Management, and this is their first podcast, both of them. So we have Michelle Creed, who's Partner and Co-Head of Real Estate Secondaries, and Min Zhou, Managing Director in the Ares Secondaries Group. Welcome, welcome to Michelle and Min. Thanks for being here.

Michelle: Thanks, Stewart. Really excited to be here with you today as well.

Min: Thanks, Stewart. Love the opportunity.

Stewart: Yeah, it's fun. Let's do this. So we always do it the same way. We'll start with you, Min. Where did you grow up? And here's my new icebreaker. You ready for this one?

Min: Sure.

Stewart: What job would you want if not this one?

Min: I grew up in Shanghai, in China. I actually had my undergrad degree in journalism, and at the time, my dream job was to be a writer for The Economist, and if not working for Ares, not in real estate secondaries, that would be my alternative world. I'd love to still be a writer for The Economist.

Stewart: It's so interesting because the editor of the Economist was the keynote at the CFA Chicago Annual Dinner, and she said that she reads everything they publish, and I thought that was astonishing. I can't imagine. Alright, Michelle, your turn. Where'd you grow up, and what would you want your job to be, if not this one?

Michelle: Sure. So grew up in West Hartford, Connecticut, and can say that I still reside there today, which makes it a quick walk around town. Dream job. So if I'm dreaming, I guess I would say a professional athlete. That would definitely be dreaming. But I just think it's such a unique way to get to see different parts of the world with a lot of work involved as well.

Stewart: Alright. Michelle, I lived on Wood Pond in West Hartford.

Michelle: That is a place where I used to run often, so that is a small world. Wow.

Stewart: Yeah, I was at 46 Wood Pond Road.

Michelle: Love it.

Stewart: In West Hartford, which is right around the corner from West Farms Mall and not far from the offices of the firm that I was working for. So super interesting, and I want to talk a little bit about your path. Can you tell me about how did you get into these seats that you're in today? And the reason for that is really folks who are earlier in their careers, maybe newly out of college. I think it's helpful for people to understand how your career has progressed to this point. So we started with Min last time. Michelle, if you would just give us a quick overview of your path, and then we'll get into the secondaries.

Michelle: Sure. So joined Landmark Partners in the early-2000s. Landmark was actually acquired by Ares in 2021, but when I joined, the team was really small, so five people focused on real estate secondaries. There were probably not more than that that focused on real estate secondaries on the planet at the time. So learned certainly along the way what it was, and we'll talk about that today. But really, the great thing about being on such a small team was that I got to do a little bit of everything. So research early on, acquisitions early on, sitting in on deal meetings with external parties, and all of that helped me to get a good understanding of the business in the early days, and then certainly let that transform into where I am today.

Stewart: Super helpful. How about you, Min?

Min: Well, I grew up and lived in different countries. Following Shanghai, I moved up to Singapore, then Germany, and lastly moved here with my family. I was pursuing my graduate study, and I actually had my mind set on working for a big allocator, maybe like a pension plan. And one of my professors happened to introduce me to this boutique shop named Landmark, which happens to be in this very niche strategy called secondaries, which I've never heard of at that point, who happened to be both a GP and LP, an allocator. So that was a perfect match, and that was 12 years ago. So I was super fortunate that Michelle and others on the team were able to really take a chance on me, and the rest, I guess, is history.

Stewart: That's fantastic. Alright, so earlier this year, we hosted a podcast on secondaries focused on private equity with Nate Walton from Ares. Real Estate Secondaries is less well-known by some of our listeners, but I would say makes a heck of a lot of sense given where things are in real estate. So Ares Secondaries was an early mover in real estate secondaries. Can you tell us a little bit about the history? And you touched on it, Michelle, but touched on how that market developed.

Michelle: Sure. Happy to take that one, Stewart. So the real estate secondaries market started a few years after the private equity secondaries market. And if you go back, private equity secondaries started in the late eighties. Landmark was really the early entrant in the space, and we can thank the insurance capital of the world, the Hartford area actually, for forming the beginning days of that business. They were looking to sell and Landmark at the time found a way to buy those interests. Fast forward to 1996, a large US state public pension plan came to us and said, “We know what you do for private equity. Can you sell or buy our portfolio? Can you buy it from us? We're looking to take our entire private real estate book and redeploy it into the public REIT space.” And so at the time, we didn't have resources in-house for real estate, so we acquired those resources and ultimately bought that book. That became the beginning of the real estate secondaries market. So really pioneering the space, and as you go forward, those early days, the first 5-10 years of the market were limited partner transactions. So investors, whether they were insurance companies, public plans, or other institutional investors selling down either single fund or multiple fund interests, and certainly it's evolved quite a bit since then, with new innovations in the market.

Stewart: I didn't honestly know that the history went back that far. Can you talk a little bit about how this market has evolved, especially over call it maybe the last 10 years or so? 

Michelle: Sure. When you think about the points in the market that really started to help fuel some of the growth, what we saw first and foremost coming out of the global financial crisis, that was one moment. So maybe going back a little bit farther than 10 years, what we saw there were a lot of funds that had been raised by real estate general partners or private equity real estate funds, and generally talking about closed-end funds, whether they’re value-add / opportunistic had been raised during the peaks of 2005, 2006, 2007. Certainly a lot happened to real estate valuations post global financial crisis, and as a result, that fueled the beginning of the growth on the LP side in a very formidable way. So you started to see endowments sell, you started to see foundations sell, and around 2015, you started to see more and more public plans sell as well. So LP led, continuing to track up, transaction volume year over year continuing to grow in a meaningful way. Then we started to see the next piece of innovation and this started I would say first with the private equity secondary market and then made its way to real estate secondaries and that was the start of the GP-led market or the general partner-led market, meaning that you didn't have institutional investors selling, you had general partners, US sponsors of funds looking to do something with their portfolio.

Stewart: It's interesting because, and I'm going to need a definition here in just a moment, so hang on, I'm practicing without a license just here. So we know about the increasing use of continuation vehicles and both in single asset, multi-asset, in private equity and private credit. What I'd like you to do is kind of define what a continuation fund is to you, right? Are there similar structures happening in real estate? Can you talk to us about that topic?

Min: Yeah, absolutely. Happy to take that one. So the continuation vehicle, generally speaking by the way, it's very similar between private equity, which you've heard of, and real estate. And we define it as that you take a set of assets could be all or some parts of the assets in a given vehicle to put into a new vehicle or continuation of the old vehicle, give it new life, a potentially new business plan, potentially some new growth capital to enable the same sponsor to continue to execute business plan. Whereas offering liquidity to the existing limited partners in the old vehicle. It is one of the forms of what we call general partner-led deals, or GP-led deals, in the secondary market. Actually, for real estate secondary, as Michelle talked about, we have had a lot of evolution over the last five years, so much so that the continuation vehicle and the broader GP-led market is now representing about two-thirds of the overall transaction volume since 2020.

And there's a lot of these type of deals because there's this driving force behind it, some of which is similar to private equity and private secondaries as we know because of the rate hiking cycle and higher for longer environment we are in, the direct transactional market is down over 40% from what was 2022 and the distribution activities in the closed-end funds is even down further by over 60%. And all the GPs would need to find alternative ways to produce distribution back to their LPs. And this is true across all private asset classes, but real estate is hit particularly hard. The distribution activities as a percentage of NAV, as we track it, are about a third of the historical average level. So that's really one of the driving forces behind the growth of the continuation vehicle or the broader GP-led market. The other thing I would like to highlight, as people have noted, the single asset continuation vehicle has been a very big part of private equity; it is also a part of the real estate secondary market, particularly in what we call the New Economy sectors. Those are the digital infrastructure data centers, cold storage, where these assets are very large and have a lot of growth, also CapEx intensive, and also require a lot of operational expertise. So these GPs come to the secondary market to get additional capital to continue to scale their platform. So there are lots of these platforms, or single asset continuation vehicles in the real estate secondary market as well.

Stewart: And do you see, and I don't know if this is Michelle or Min, but do you see a lot of structured transactions in real estate secondaries?

Michelle: We do. The structured part of the market definitely started within private equity secondaries first and foremost, but the DNA for that has always been with us, and so we did our first structured solution with a limited partner back in 2009. So there's been a history there, certainly. In the current environment, conversations with both general partners and with limited partners that make their way into the structured conversation are a big part of what we're seeing, especially today with limited partners as they look at bid ask spreads and discounts being as wide as they are. So discounts today on the real estate secondary side just to ground you there, provide some framework, still around 30%. So a 30% discount to the current net asset value. Structure can be a way to mitigate that discount, so it can be a real eye-opener in a conversation and allow boards to get things done when they otherwise couldn't.

Stewart: That's super helpful. At InsuranceAUM, we continue to see insurance investors interested in real estate, and as a result of that—that's the result of a direct poll that we did at our Chicago event—we have this real estate infrastructure-focused specialty event in Philadelphia coming up in March of 2026. Our objective there is to gather insurance investment professionals who are focused on real estate and infrastructure, but the folks who are specialists in this world, there is a language all its own, there are issues that are unique to real estate, to that asset class. And so what we are trying to do is gather that group of people together to promote best practices in that asset class and to learn from each other. So, having said that, what are some of the benefits of real estate in a private assets portfolio?

Min: Yeah, I can take that. Well, insurance companies, generally speaking, the rental income is always very helpful as far as thinking about matching their liabilities, whereas it's not a perfect hedge for inflation. A certain type of real estate, particularly those with indexed lease structures or with fixed escalation built into the lease, can really provide that inflation hedge for an insurance company. Secondly, real estate or real assets portfolio more broadly provides that diversification benefit to the insurance overall portfolio, having that lower correlation to their fixed income and equity portfolio. And lastly, as I come to appreciate this from the insurance perspective, capital efficiency is very important to them, and generally speaking, we understand that real estate is treated more favorably as far as capital charge compared to the conventional private equity investment. So all of those are potential benefits for the insurance company.

Stewart: Yeah, I mean, it definitely impacts… Not everybody, but some people look at it like return on statutory capital, and so that's an important consideration. I know, Min, that it's my understanding, at least, that you work with some of Ares’ insurance clients on portfolio construction that may include real estate secondaries. What are some of the things that you think about when you are constructing these portfolios and when you're including real estate secondaries in them?

Min: Yeah, so happy to talk about it. Some of the insurance clients that we're working with, they're still fairly early on in building out their alternative allocations, specifically in real estate. So secondary is a very useful tool for them to quickly get dollars in the ground to work, whilst getting the benefit of diversification. So that's number one. And number two, let's talk about diversification for a minute. So by definition, real estate secondaries provides multidimensional diversification benefits across vintages, the geography sector, and where the assets are in their life cycle. So those when done correctly will produce a portfolio with lower volatility, which we know ultimately will be helpful as the insurance company look at the volatility of their earnings. And lastly, we talk about the LP-leds and GP-leds early on, and those two types of transactions in real estate secondaries have differentiated and complementary cashflow profiles. So the GP-led deals tend to have a more bullet cashflow pattern that can be used to defease or match up liabilities, say call it a five-year annuity products, for example. Whereas the LP-led deals tend to have cashflow day one and over an extended period of time, so they can be used to defease a variety of liabilities for insurance companies. So we see all these as important tools when helping insurance clients to build out their real estate or real asset allocation.

Stewart: It's super helpful to think about it in that way. Over the last several years, we've seen some declines in real estate values depending upon what sector, what geography, but notably in core vehicles in the US and parts of Europe. From your perspective, how is this environment shaping the opportunity set for real estate secondaries, and how are you positioning your strategies to take advantage of that situation?

Min: Yeah, indeed real estate is very interest rate sensitive, and real estate has had one of the major value corrections this past cycle. And if we use the NCREIF index, which stands for the National Council for Real Estate Investment Fiduciary, that represents core value. If you look at the index from peak to trough, there's about a 20% decline in unlevered value, and that varies dramatically from sector to sector. Office is over 40% whereas industrial sectors are about 10%, but overall we had a major correction of 20%, which really sort of sets the stage for this upcoming cycle. Within the last 12 months or so, the index has been more or less flat where we’re thinking that we're getting close to the bottom of the market.

Michelle: And maybe just to add a little bit there, because I do think we have bottomed out in terms of real estate valuations, broadly speaking, and have now started to see reason to believe that fundamentals are actually on the rise. And so what we've known and a little bit of pattern recognition that we've seen over time within secondaries, if you go back to the global financial crisis, so real estate values came down a lot more than 20%, it was about 40% and it wasn't just one sector, it was all sectors. So definitely decimated real estate valuations. But what we saw during that time was that as they started to pick back up transaction volume on the secondary side accelerated very quickly. So you started to see more and more deals get done. And what was happening was that deals were getting done because discounts could finally start to come in some, so I mentioned before discounts today about 30%. Reason to believe that with fundamental strengthening investors wanting to get back in the game, back into real estate, that discounts are likely to start to be in that 15 to 20% range. If they go down to that range again, that's when limited partners of the LP-led side of the business really starts to pick up globally for secondaries. Just broadly speaking, it's a good metric. That's what we've seen in the past. And so in the current timeframe, knowing where we are, knowing that investors want to redeploy, they need that capital to redeploy, they're going to utilize the secondary market to get that capital back, redeploy into new funds, and as a result, we think transaction volume really picks up.

Stewart: One of my jobs here is to ask questions that I don't know maybe are in the heads of people but they don't ask and there are perceptions of various asset classes that may not be accurate. And so one of those, at least in my experience is that folks who are investors who are less familiar with secondaries sometimes perceive that you are buying underperforming assets from the seller. When you mentioned a 30% discount, that sounds like distress to some, right? It's just kind of the way that we're all tuned. How would you respond to that?

Michelle: Sure. So definitely I think that is one of the misconceptions within real estate secondaries, and really secondaries broadly is that are people looking to sell the stuff that just isn't going to trade elsewhere. And what we've seen is that that's not the case. If you think about the market for a moment, there are very few groups that do what we do. That think about real estate secondaries every day as a buyer. So, as a result, there is a supply-demand dynamic right now that's very favorable for the buyer. And as a result, if you're a seller, think about the reason you're looking to sell. It's not because you're bringing an asset to the market to sell it for the top possible price; you're looking to sell because something is happening to you, portfolio management, you have a desire to shift your portfolio within real estate, maybe more value add, maybe more core, maybe more opportunistic.

It could be any of those three things. Perhaps it's debt in the current environment. Or you have a new CIO come on board. They would like to switch out some of the names, not because they're good names/ bad names, but simply because they would like to redeploy with groups that they have known over the years and have done business with in the past. Those reasons don't have to do with quality as a result. They want that liquidity; they need to bring to market things that are going to sell. They need to bring the most liquid things. The most liquid things are actually going to be the funds that are quality, the assets that are quality with quality managers. So secondary market buyers, as a result, are often seeing very high-quality portfolios, oftentimes very seasoned and stabilized as well. They're just electing to sell them at a different moment in time relative to the underlying fund mechanics.

Stewart: So talk to me about this. If I'm an insurance LP or investor, allocator, whatever you want to call the asset owner, can I use real estate secondaries to rebalance my portfolio, and can I use it to get access to segments that I might just want to maybe tweak my exposure mix? It seems like, given the way that you're explaining this, that this would be a very good way, not only that, but you know what the asset is, you can evaluate the asset, it's existing, it's not to be built to be, whatever. Can you help me with ways that I can rebalance or change an existing portfolio?

Min: Yeah, absolutely. Insurance companies have actually historically been a staple of the seller type that we do see. On our team, we've done transactions with insurance companies both in buying their limited partnership interests in closed-end funds, but also recapping, so assets that they own directly on the balance sheet for some large insurance companies. So we've done both LP- and GP-led deals with them. So just talking about data, the real estate secondary market is quite a bit opaque, and as a result of that, we actually track market transaction activities ourselves. So, looking back 10 years, insurance companies, in a typical year, they'll account for somewhere between 5% to 10% of the transaction volume of all transactions in our market, and is certainly a significant player in our market. And more recently we've done transactions, but also have had very active conversations with both domestic and offshore insurance companies, and some of them are coming through the broader Ares relationships as well.

They reach out to us to get pricing feedback on their books and what other creative solutions we may come up with them. For example, there are certain insurers looking to improve their capital positions because certain treatment of certain of their real estate investments have changed, and therefore they have this non-economic motivation to offload some of these positions. There are other insurance companies that would like to sell, however, because there's less capital charge on real estate, there's less room for them to take a direct loss onto their books. So in that type of situation, we're exploring the structured solution that we just talked about to help them see how we can overcome this potential hurdle. So there's lots going on in the market with insurance companies, and we're hopeful that we can provide more creative solutions for them to solve their portfolio rebalancing needs.

Stewart: Yeah, it's super helpful, and every situation's a little different, right? But it's nice to hear that there's the possibility of finding creative solutions. One last business question, and this is a long one, so fair warning, but Ares is well known as one of the largest private market asset managers, US and globally, and it's especially well known for sponsor relationships, boots on the ground in credit and real estate. We've published a podcast with Ryan Brauns from the Ares US Direct Lending business, and we also hosted Bryan Donohoe and Brent Canada talking about real estate credit. The question is, does your team benefit from being on that platform? Are you able to do deals with other parts of Ares? Can you talk just, I think as an investor, I think sometimes it's hard to get a handle on how one part of a firm works with the others. Talk to us a little bit about that.

Michelle: Sure. So I think the culture of collaboration is real at Ares. We've felt it really since day one of being part of the Ares team back in 2021. And for the real estate secondaries team, it's really coming from two different channels, one being sourcing and one being underwriting. On the sourcing side. So you mentioned Bryan Donohoe. When he's having conversations with sponsors and talking through various credit options, it's often the case that there's not only a refinancing that's occurring, but there's also a potential for a recapitalization. Bryan and I talk very often, so we can see those pipeline deals really come over to us on the secondary side. Similarly so, Andrew Holm on the equity side of the business, oftentimes will be talking to operators, talking to other GPs where a recapitalization and a secondary leaning in that recapitalization can make sense. And so that warm introduction that he can provide to our team has helped and really amplified our voice within the market.

When we think about the underwriting side, the fact that the Ares Real Estate team has more than 700 individuals globally focused on real estate day in, day out, and more than 600 million square feet of industrial alone, that has been so impactful for our business. Being able to hear the trends that they're seeing, understand firsthand what leasing looks like in a particular sub-market for an asset that we're underwriting. It not only makes us that much deeper of an acquisitions team, but candidly makes us that more efficient of an acquisitions team. So two big benefits in terms of real synergies that we can see.

Stewart: That's super helpful. So okay, first of all, it's been an amazing conversation. I've learned so much, and you both have done a great job of answering your questions, which I've learned a lot from, which is always my goal, right? I got to get smarter. But here's the thing, this question is really intended to get at the culture of Ares, right? When you are adding to members of your team, what characteristics are most important when you're interviewing folks? It's not that you can code? Can you use Python? That's fine, there's a lot of smart people in the world, but character's a little different. So how would you answer that?

Michelle: So we've interviewed a lot of people over the years, and I think two traits are really, really important. I agree it's not just on the technical side. Certainly, you can check that box and feel good there. You can test someone with a case study, but curiosity because you need to be able to be curious and ask the right questions as an underwriter. And then critical thinking as well. I think critical thinking makes you not only a good investor but also helps you recognize the elements you might be missing along the way, and helps you build upon your experience set to utilize in the next test case. Min, if you have different ones…

Min: Yeah, I was reflecting on what we were just talking about this morning about what Keynes was predicting that he basically famously predicted in 1930, that a hundred years from then, which is only five years from now, that we all are going to have 15-hour work week because of all the technological advances that we're seeing, certainly from AI. So it's very hard to predict what is the right skill sets when you're investing in 22-year-olds today. So I agree with Michelle there. I think curiosity is first and foremost, but also I think if there's a way to assess humility, because I think investment is, at the end of the day, there's a lot of randomness in that, and being able to live with your wins and losses, and then being able to learn from that over time and really keep that in mind. There are a lot of things that you do not control, and you do your best on things that you can control. So I don't know whether there's a way to assess that through interviews, but that's the kind of people that I love to have on our team.

Stewart: That's awesome. I think sometimes it's more of a 15-hour-a-day than 15 hours a week, but yeah, I hear you. I can understand that. Alright, last one. This one, whenever we have two guests, you get to each have one selection on this question. So this is dinner for four, it's the two of you, and you each get to invite one guest, alive or dead. Min, we'll start with you. Who would you, and keep in mind now there's some optionality, you know, you’ve got Michelle, but you don't know who Michelle's bringing, so who's your alive or dead dinner guest?

Min: Okay, I'm going to go with sports. I'm a lifelong Liverpool fan, and so Steve Gerrard is really my hero through and through. And really, the 2005 Champions League final and what we call The Miracle of Istanbul is really of emotional value to a lot of Liverpool fans, certainly all Liverpool fans and a lot of sports fans. I would love to have Steve to join the dinner and really relive that moment 20 years ago now.

Stewart: Yeah, it's interesting. I believe my good friend Sean Thompson is a diehard Liverpool fan. I hope I've got that right. If not, he'll never forgive me. Michelle, how about you?

Michelle: See, I'll stick with the sports theme. I would pick Mikaela Shiffrin. So you look at a woman that really has got not only to the pinnacle of her sport, but has continued to push it. I think if we're sitting here today, 103 World Cup wins and going into an Olympic season – that's pretty unique in any sport, and just seeing the process that she's taken to get there and continues to work at it, I think that would make for a fun conversation.

Stewart: That's super cool. Now, at the beginning of this show, you said you wanted to be a professional athlete, but you didn't name the sport. What's your sport?

Michelle: Well, I wouldn't say that ski racing is my sport. That would be my daughter's sport. I played lacrosse growing up, and I would probably put myself in that position.

Stewart: There you go. That's awesome. I really appreciate it, it's been a great, great conversation with you both. And just as a reminder, the title of the podcast is “Real Estate Secondaries: Opportunities for Insurers in Evolving Markets,” and we've been joined today by Michelle Creed, Partner and Co-Head of Real Estate Secondaries, and Min Zhou, Managing Director in the Ares Secondaries Group. Thank you both for being on. It's been a real pleasure to have you on.

Michelle: Thank you, Stewart. This was a lot of fun. Appreciate it.

Min: Same. It's great fun. Thanks.

Stewart: If you like what we're doing, please rate us, review us on Apple Podcasts, Spotify, or wherever you're listening to your favorite shows. You can check out our new YouTube channel at Insurance AUM community, and if you have ideas for podcasts, you can send us a note at podcast@insuranceaum.com. We are the home of the world's smartest money at InsuranceAUM.com, now an affiliate of The Institutes. Thanks for joining us.

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