Expert Q&A: Stephen Tomlinson of Kirkland & Ellis

This expert Q&A with Stephen Tomlinson, a partner at Kirkland & Ellis LLP, is part of a report from the PrivcapRE Presents event featuring an interview with Michael Nash of Blackstone Real Estate Debt Strategies. You can read that report here.  How has the globalization of commercial real estate capital flows impacted transactions? There has been substantial activity by non-U.S. investors in 24/7 cities such as New York, London, and San Francisco, and it has created a positive momentum on valuations. U.S.- based investors who are trying to generate a greater-than-core return are finding it very difficult to compete [with such investors] for existing stock. [Although it’s an] attractive time to sell into those markets…it’s difficult to deploy high-returning capital in 24/7 cities. Not impossible, just difficult.

Are increased foreign capital flows in U.S. real estate here to stay? Yes and no. If we have settled into a new paradigm of oil market pricing, non-U.S. investors who are heavily driven by oil revenue may have less-rapid inflows to their organizations…and one might expect their investment pace to slow. At the same time, you are seeing significant [new] flows of capital coming out of Asia, particularly China. These are substantial sources of capital, [so overall] few expect a diminution in foreign capital volume, and we could see an increase. It could just be coming from different places. How is foreign investor appetite different? We are seeing increased appetite for direct investments by larger non-U.S. investors. There is less appetite for making large investments into funds and more appetite for bespoke transactions where investors have a greater degree of control. One area we are seeing significant emphasis on for large non-U.S. investors is co-investment, which can often times be much larger than the commitment to the main fund. What does the growth in co-investment rights mean for GPs? What’s difficult for the sponsor is knowing whether the investor is able to execute. Investors ask for many kinds of rights, but will they, and can they, use them in a way that’s commercially practicable, especially in terms of dealmaking? Investors need a GP that has the time to dedicate to sourcing and executing co-investment deals and a team dedicated to managing that co-investment piece. At the same time, you have to have an LP nimble enough to be able to act on deals in a relatively short time frame. Deals don’t tend to hang around.