Episode 391: Bull Market for Real Estate Secondaries

Are you working at an insurance company managing private assets, specifically private credit or ABF? If so, this is your event. I'm excited to share that we're headed back to Austin, Texas on November 12th and 13th, 2026 for the insurers' private credit forum. An invitation only event built specifically for insurance investment professionals focused on private credit and ABF strategies. We maintain an industry leading LP to GP ratio, which creates a collaborative, low pressure environment where your voice can be heard. Just meaningful conversations with peers who truly understand the challenges and opportunities that we all face every day in our industry. These are the people who are shaping the future of insurance investment portfolios in real time. And frankly, one of the things I love most about this community is your willingness to share ideas and learn from one another. Last year's event was phenomenal and we're building on that momentum in a big way for 2026. Build new relationships and participate in structured discussions where you can engage directly with managers and fellow allocators on topics that matter most to you. And yes, it's Austin, Texas, which is one of the greatest cities in the country, live music capital of the United States and certainly going to be some fun along the way. Space is limited. This event is likely to be sold out so head over to insuranceaum.com/events to learn more and reserve your spot today. Welcome to another edition of the insuranceaum podcast. AI's got to transform how we do business. You don't learn much from funding a transaction. You learn everything from being repaid. I think it's a good time to invest. We have an unsure inflationary environment. We have an unsure monetary environment. There are positive times and negative times. The market just needs less volatility. Risk is increasing and rewards are decreasing. My name's Stuart Foley. I'll be your host. Hey, welcome back to another edition of the insuranceaum podcast. I'll be your host. And today we're talking about what might be a particularly interesting moment in real estate. The reset in interest rates put an enormous amount of pressure on valuations, leverage, liquidity, and transactions activity. But those same pressures are now creating very different opportunities set for investors with capital, patience, and the ability to provide solutions. Which brings me to today's topic why this may be a bull market for real estate secondaries. And I'm joined today by Brandon McDonnell and Margaret McKnight of Stepstone Real Estate. Brandon is a partner and chief operating officer of Stepstone Real Estate. He has a deep background in the space having been a founding partner of Clearview Capital Partners. Which is integrated into Stepstone, which established Stepstone Real Estate. Margaret is a partner and head of portfolio solutions for Stepstone Real Estate. Prior to joining Stepstone, she spent more than a decade at Carl Isles Metropolitan Real Estate where she served as Co-Chief Investment Officer. So both of these folks have spent a lot of time in real estate and know it well. Welcome to the show. We're thrilled to have you both. Thanks, Stuart. Thrill to be here. So before we get into real estate, we always like to get to know our guests a little bit. So I want to start with you, Margaret. Where'd you grow up? And what's a fun fact that your colleagues at Stepstone, maybe Aaron or Jason, would want to know about you? So I grew up in Philly and somebody recently complimented my accent, who was not from America. And it gave me a good laugh because that's not common when you come from Philly. That's funny. I'm from Missouri and I've never been complimented on my accent either. Yeah, well, there you go. I'm with you. It's hilarious. I actually outside of work, love to be creative and I make jewelry as a hobby. Oh, do you really? We got to talk about that offline. Okay, good. I'm sure my wife would be interested in knowing that. How about you, Brendan? Where did you grow up? And what's a fun fact that your colleagues would want to know? I was born in Ottawa, Canada, but moved to Bloomington, Indiana when I was in the fourth grade. So I spent most of my four minute of years in the Midwest. Bloomington is a great, great town, college town, a lot of great basketball history and also the national champion college football team. Fun, fun facts. You know, I was prepared to tell you about my first job. So I guess I'm going to roll with that. There you go. So as a Canadian that moved to the Midwest in the 90s, I knew how to ice skate. And so as roller blades were coming on the scene, I, because I knew how to skate, I ended up getting a job teaching people how to roller blade, which doesn't have quite the sex appeal today that it did in the 90s. But like real estate, these things tend to be cyclical. So maybe, maybe it'll come back one of these days. I think they're still in the closet. I remember those days very well. I lived in Imperial Missouri and we had an asphalt driveway and I bought a pair of roller blades. And I was miserable. I mean, beyond. I'm a motorcycle guy. My balance is okay. But like skiing and like when you put something on my feet that's not directly touching the ground, everything starts going wrong quickly. So I have a lot of respect for your proficiency in skating and rollerblading. You know, a lot of friends in Canada. And like you said, like, I don't know if you skater walk first up there, but it's definitely part of the program. You just needed a better teacher to it. That's right. That's what I needed. I hope I found you. So Margaret, let's start with the underlying asset class. That's real estate has gone through a significant repricing since rates begin to move higher in 22 stepstones view as I understand it is that the trading prices are now near the bottom of a cycle while the outlook for property income is actually pretty constructive. Can you make the case for real estate today and why does the asset class look attractive from where you sit? Well, you hit a couple of the points. First of all, real estate has price corrected is near the bottom of the cycle. We did just have a jump and interest rates, but that apart. It was pretty fairly priced. That is not the case for other asset classes, which either quickly rebounded or didn't really correct. So from a pricing perspective, it makes sense, although when you look in the rear view mirror returns are lousy because prices fell, so they're low. So that's actually a signal that you should invest. Also, when you look around, there's a lot of disarray. And we're going to talk about this, but when interest rates jumped and the cost of borrowing went up, the loans became too big for the actual income streams. So there's a lot of balance sheet problems, only 17% of the loans that came due last year in the US were completely resolved. 800 million got deferred. Well, we can talk more about this. There's a lot of penup need to sell and a need for structured solutions that avoid taking losses. You know, a lot of managers feel like if they just had more time, they can grow out a lot of these problems, so we would are really interested in on the pricing side of buying time. So then the bad news in the disarray also make it a good opportunity. As you pointed out, we've got inflation and higher interest rates making more expensive to build. So new starts and deliveries are really finally starting to slow. And the outlook for income growth is decent, despite, you know, the weaker economic position that you may be worried about hasn't quite happened yet. And that's the average. There's real estate as big diverse markets and we play globally. There was a lot of opportunity where there's pockets of strength and outperformance if you know how to find them. So that's the sort of cyclic position and then just generically real estate is really useful to portfolios. It provides a lot of current can provide depending on the strategy, a lot of current income, which either can be used for distributions or is just risk mitigation. It has demonstrably provided protection from inflationary shocks that have really devastated financial assets. And then finally, it has very low correlation to stocks and bonds. So if you're worried about an overvalued stock market, this is a great thing to have in your portfolio. The only thing I would add is just that while real estate is a global asset class, the dynamics tend to be very local. And so a given property type can be underperforming in one market because of an imbalance of supply and demand and outperforming in others. And so that's really when or why steppestones global team and platform and footprint, which allows us to identify similarities and differences across markets in terms of the outlook for for sectors and markets. Yeah, it's interesting. Can you comment on real estate as an inflation hedge? And here's why I ask the insurance industry faces claims lay of. abilities. And they price in an inflation assumption. And I'm talking in particular about like long dated workers' comp liabilities or long dated med mal where they're exposed to inflation. And inflation is a kryptonite to their bond portfolios. So that's the source of the question. Yeah. So there's really two kinds of inflation to think about. And one is the sort of garden variety CPI inflation. Real estate does a fine job of keeping up with that actually soda stocks. Right? On the other hand, the thing to worry about and the thing that has been so devastating to financial assets is unanticipated inflation. So that's what we experienced in the 70s. And again, in the immediate post-COVID period. So like from 1973 to 1981, the average inflation rate was 9%. So that's exactly the problem you're worried about, right? Real estate, and this is really core real estate with no bells and whistles and mostly unlevered for the delivered a 13.6 while the S&P delivered a five. But that five was after net of a pretty serious fall that did not all organizations and corpuses made it through there. And we saw, we have a chart in our house views, which we're happy to share. We saw a very similar dynamic in the immediate post-COVID period. I mean, you know, inflation is not, I mean, you know, some inflation is driven by macroeconomics right now, but some decisions are, or some, some of this inflation is based on decisions we've made, right? And so it's not, well, it's not easy to forecast things like that that, you know, I think the fancy economic term is exogenous shocks. So here's what I find interesting about stepstones thesis. Asset values have adjusted, but you've made the point that many real estate balance sheets still haven't fully adjusted to the 22 rate shock. So we have assets that may be approaching clearing prices, but owners and funds that can still be over leveraged overmarked or in need of a capital solution, can you talk about what that adjustment is going to look like and why it's kind of, I think I know why it's taken so long to adjust. Folks are not wanting to deal with reality, but can you talk a little bit about that? Yeah, you know, real estate funds are broadly marked based on third party appraisal activity, and appraisers like to have transaction activity and data to support the changes in the assumptions that go into these valuations. So what, one of the challenges that you have during a market dislocation is because there tends to be the slowdown in the volume of trades, there's just fewer data points to go off of to support changes in assumptions. There's also, there just tends to be sort of a lag in real estate between what happens in the real spot market and where marks tend to be carried on funds books. And so Margaret, it's funny because there are asset classes that everyone knows doesn't have a lot of liquidity. And inevitably, there are people who own those assets and need liquidity, which creates opportunities for those who have liquidity. And so we've got LPs, some LPs looking for liquidity, GPs looking for time and capital assets that aren't necessarily reaching their natural exit. Can you talk a little bit about why this particular combination creates an interactive opportunity set for real estate secondaries? Yeah, so LPs are very hungry for liquidity because distributions have been running since 22 about half of normal. So they're not getting money back, which means they can't give it back, they can't write new checks for new primaries, right? So the GPs are getting it and they're very frustrated. So the question is, why aren't they selling? Well, the crux of the problem really does go to this valuation issue because their marks are through a fair and process for valuing opaque, and my favorite word non-fungible assets, right? Everyone is different. Their marks are often quite a bit higher than where properties are trading. So if they sell, they have to recognize a loss. And the sales last year again were low, distributions were low, but the average loss on the sale is 25% out of a non-core fund, which is not at all surprising to us when we look at how much those have dropped in value versus asset prices. So they do not want to sell and/or they're over leveraged and they need to work down some debt to get some runway. And you usually, in this case, the kind of stuff we're looking at, there are a lot of high quality DPs with quality assets that they have now just paid too much for because the interest rate shifted since they bought them and they really do have a credible case that with income growth and maybe some residual improvement at the asset that they really can substantially grow their way out of the problem if needed could have more time. And that's where Brendan and the crew come in to structure solutions that buy out the LPs who want out, that provide new capital to solve some of these funding gaps and restructure the loans and recast the whole thing so that it works, reset the GP comp, like give them the runway that they need. And they're actually willing to pay a lot for that effectively through the structure of the deal because it keeps them from having to sell it a loss and it lets them find liquidity for their LPs but also less and keep control of the assets. But Stuart, I think that the key is that you need a catalyst in order to sort of clear this log jam of assets that are being held in closed-end vehicles. Now, one of those catalysts is simply the end of funds' lives. And based on our research, today there's more than 250 billion of net asset value being held in closed-end funds that are beyond their 10-year life. There's more than a trillion dollars of net asset value held in real estate funds that have been held for more than five years. So at a stage that they should be starting to realize these assets, but so those funds reaching the ends of their lives, the legal obligation on the managers to begin liquidating assets and funds is one of the catalysts that is driving transaction activity and really driving the opportunity set in the GP-led secondaries side of the market. The other catalyst is just debt maturities and there's been much that's been set about and written about the wall debt maturities and over the last several years, rather than those maturities forcing asset sales. Instead, there has been a tendency to kick the can along the road and extend or forbear and modify. But as we look at our pipeline today, the primary driver of a deal flow is balance sheet issues and owners that require new injections of fresh equity in order to do leverage assets so that they can get a refinancing done. And so that's another important catalyst that's really driving the opportunity set for recaps and secondaries today. And I'd like to, this is a topic that we've covered prior, but it's a really important one, which is GP-led secondaries. And for folks who, and one of the things I think that, you know, there's, there's fixed income people in this world and they have their own language and they have their own knowledge base. And there are direct lenders and the same thing. Real estate people tend to be their own, all their own. And they don't like, they don't really cross over and do other stuff. You need a lot of expertise to be effective and successful in this market. So for folks who don't live in this market every day, can you talk a little bit about how GP-led secondaries work and why that structure is particularly interesting right now? Sure. Yeah. So first, I mean, I'll contrast the GP-led secondary with what is referred to as an LP secondary. I'd say in a traditional sense, an LP secondary is you have an investor in a fund, a closed-end fund whose capital tends to be locked up for a period of time. And they are looking to get liquidity for one reason or another prior to just the natural liquidation of the assets in that fund. And in most areas of the private markets, real estate included, there's, there's an active marketplace of buyers and sellers to buy these indirect limited partnership positions in closed-end funds on the secondary market. Contrasting that with a GP-led transaction in a GP-led deal rather than the investor being the protagonist, In a GP lead deal, it's actually the manager of the assets that is looking to facilitate some sort of a liquidity solution for assets within its portfolio. Sometimes that's because there's assets at the tail end of the fund that require more time and more capital in order to optimize value, and they're looking to transfer those assets into a new vehicle with a new set of investors and reconstitute the timeline of capital structure on a go-forward basis to provide that time and capital to maximize value. The other, let's say, unique sort of nuance in real estate is unlike, say, private equity, I think there's a much wider range of structures that institutional investors and managers hold real estate through, so the GP lead secondary space in real estate, it's not just commingled fund structures, it's joint ventures, it's private REITs, it's real estate operating companies separate accounts, and any one of these formats that you have institutional assets and managers can be conduits for secondary, as well as recap transactions as liquidity needs arise. One of the things, I mean, I've had the privilege of working with Stepstone for a number of years, and one of the things that folks might not know is Stepstone's commitment to technology, right, and data. So, Stepstone's model at that point creates an interesting information advantage. I mean, you're a large global allocator to real estate managers, and you're also active in secondaries and co-investments, so how does being active across all those places make you a better secondary investor? And I suspect that both of you are going to have something that I didn't mean to say to one of the other, you're both welcome here. Well, I'll jump in and Margaret, please feel free to hop in as well, but just quickly, I mean, Stepstone, across its primaries investment business, we are committing roughly $15 billion of primary capital each year to private real estate that tends to be across 60 to 70 distinct funds or vehicles that we're underwriting each year. And to do that, we're having over 1,000 manager meetings around the world with GPs, and every one of those interactions is a chance to learn. What are they buying? What are they selling? What liquidity needs? They may be seeing across their client base. What vehicles within their portfolio may be due for some sort of a wind up or continuation fund opportunity. And so the level of interaction that we have with the GP community, the amount of data that we collect on the portfolio that we're then monitoring post investment, does give us a true edge both from a sourcing of new secondary and recap opportunities as well as a treasure trove of data to inform our underwriting indiligence on investments. We are part of an effort called Ready Real Estate Data Initiative across the real estate industry to take the reporting on closed-end funds, which is really opaque. And provide GPs with a standard template collecting asset level data, which is absolutely critical for understanding what's in there and underwriting. And we have, we report, we work across about 200 billion of assets under management and advisement, we report for a lot of those clients, we collect the ready data, we're starting to collect, we have now a couple years of data on about 3,000 different properties. And so that becomes a tremendous source of underwriting information as well as, you know, we're starting to think about how to mine the database to go back to the GPs and say, hey, wow, this fits all the criteria we'd like, let's have a conversation about how we can help each other. So once in a while, the CIO folks, let me try on the CIO hat, it's not a real one, but it kind of looks like a real one. So if I'm looking to access this opportunity, steps don't work for the insurance companies in a variety of structures, you've got a big commitment with Aaron Driscoll in this space, without getting into anything that you're actively fundraising for right now, how should an investor think about accessing this opportunity set? I'm talked to us. We are very flexible, we are active also across the risk spectrum, debt and equity. We can work on to everything from tailored SMAs to evergreen vehicles to dedicated insurance funds. We are very skilled at structuring on capital side as well and are happy to work with people to provide solutions for their specific needs. Even if you had two assets that were identical from an underlying collateral perspective, the structure of the deal has significant impact on the capital treatment for insurance companies. So the way that the thing is structured, I've often said, and I think it's exaggerating a little bit, but the structure is about as important as the underlying. And so I want to leave our audience with two takeaways, first, I'll come to you, Margaret, and then I'll go to you, Brendan, what would you want our audience to take away from today's podcast? And then I've got a fun one for you on the way out. I mean, first of all, this is a really interesting time to invest in real estate, and I kind of hard to get excited about it because you have to be contrarian. But if you're smart about being contrarian and respect, the fact that it's a really sick like asset class, like all the signs are that this is a great time to go in and to go in with somebody who's really good at finding or has experience of finding the granular opportunities, the property types that actually have more demand than supply or the locations that are appealing for the structures. It's better. They can be better than average. There's room for alpha right now in probably what's going to be some very good vintage years. Most, a lot of the insurance CIOs have a fixed income background, and there's no shortage of contrarians there. Brendan, how about you? Let's take it to you the second tickling. I would say that real estate can be a lot of things. It can deliver high yield opportunistic returns, and there's certainly an opportunity today to help to capitalize on a fair amount of distress that exists within the sector given the interest rate increase and the pressure on balance sheets and the devaluation that has occurred. It can also be a great source of just stable current income at the more core and core plus end of the risk return spectrum. For the reasons that Margaret just described, that's also a great opportunity today because as interest rates have increased, you can now buy these assets at higher going in yields and because of the slowdown of construction, the inflation of construction costs. There's a nice runway ahead of us where we should see growing income streams in markets and sectors where you continue to have growing demand and fixed supply. So real estate offers opportunities today, really across that risk return spectrum. All right. I'm going to stay with you, Brandon. We got a little bit different of the door question, just slightly different. So first of all, great education on real estate secondaries. Lots of good information here, super educational, and really appreciate you both. Fun one on the way out the door. Describe your, I'm kind of excited about this question because it's new. Give your best real or fantasy dinner, Brandon will start with you real or fantasy. So while you think I can like fill some airtime here and like when I was teaching, I used to cue the jeopardy music when my students were not answering. So I'm a tennis player and I was watching the US open over the last couple of weeks and was so impressed to see Ben Shelton's run in the US open and as a dad to young athletes, I'd love to have 30 minutes to pick him and his dad's brain around just how to raise young athletes today and how to get them to kind of focus on excellence while avoiding burnout in a single sport. I think what's interesting about Ben Shelton's story is he actually came to tennis. Just late having a dad. He was a professional tennis player and a college coach. He came to tennis late in life after focusing in football and really was a late bloomer and then finally ending up in the finals of the US open. So that'd be that'd be my pick today. Okay. So it would be you, Ben Shelton, his dad and your kids where are you going any like what's for dinner? What do we have it? You know, I'm I'm you think you think on that. We're going to go to Margaret, you took Margaret for you. What's your best real or fantasy dinner because branding is pretty good. I got to say yes, so the real part easy is a handful of good friends and some really good high-quality California cuisine fresh local ingredients and the fantasy part is I would like to have my guest star B Dolly Great, it's not much fun And in addition to being a great entertainer. She is an amazing business woman And I so respect the way she has found a way to give back and make the world a better place and not just for it. Well Yeah, I mean, it's interesting because I don't know if this is true, but it's my own perception She was almost universally liked. Yeah, and that is not easy. No in this country. Are you kidding me? And and it's like good answers to like heart slash inappropriate questions that just you left with a smile Right always. She's you know, she's You know from like very very modest Beginnings, but to your point like a really savvy business woman So super cool answer both the all I just think it's just great I want to say thank you very much to both of you for being on Thanks to it really enjoyed it. We've been joined today by Margaret Mcnight Who's a partner and head of portfolio solutions for stepstone real estate and Brandon McDonald who's a partner in chief operating officer of stepstone real estate Thanks for being with us today. If you like what we're doing, please rate us review us You can catch us on any podcast platform as well as YouTube We do video podcast and this one is a video podcast that is going to be on YouTube at insurance AUM community My name is too foley. I've been your host and we'll see on the next episode of the insurance AUM podcast You