US Real Estate Markets Moving Toward Recovery

/PRNewswire/ -- The US economy is recovering and it is beginning to show in job growth. The Bureau of Labor Statistics reported an increase of 290,000 jobs for April. The largest share, 27.5% was in professional and business services with 80,000 new jobs. The federal government followed with 66,000 new temporary workers to assist with the decennial census. Health care also grew, adding 20,000 workers and increasing its year-to-date total to 244,000. For the year, employment has expanded by 573,000 with 483,000 or 84% added to the private sector.

Meanwhile, unemployment increased from 9.7% to 9.9%, which oddly is a "good" sign. The increase is the result of people re-entering the employment market; meaning the economy is starting to recover in earnest. Thus far, the data is reflecting the traditional pattern of a slowly recovering economy.

Looking at past recessions the 1980s appears to be the most similar. It was capital constrained much like we are today. In the 1990s we were over-built and had the S & L crisis to resolve. The cry was "stay alive to '95." In early 2000 we had the dot com crisis and accounting scandals. Looking at the recession of the early 1980s as a guide, it may be 3 years or more before life begins to feel like "normal." The recession of the 1980s lasted 16 months running from July 1981 to November 1982. As a result of that downturn, unemployment peaked in November of 1982 at 10.8%. From that point it took 38 months for the economy to fully recover and for unemployment to fall below 7.0%. It was another 10 months before the economy was consistently below 7.0%. So, full recovery this cycle is likely 3 years away with an optimal selling period 3 to 4 years away at the earliest. Current signals suggest now is an optimal buying period.

Thus far, the current economy is consistent with expected patterns and our forecasts. Other data is also suggesting recovery. This is further illustrated in the most recently available quarterly data extracted from the National Council of Real Estate Investment Fiduciaries (NCREIF). Beginning in the second quarter of 2009, decreases in total returns began to steadily abate, and as of the most recent quarter turned slightly positive. This offers another strong signal that the market has reached bottom and is beginning to turn upward. This is also a strong signal that we are entering an optimal buying period.

With the use of our research Blumberg Capital Partners, our parent organization recognized this cyclical pattern early, and sold its assets between 2006 and 2008, near the cycle peak and closed its prior Fund. Now the trend is reflecting a market nearing bottom and moving toward recovery. In response, Philip Blumberg CEO of Blumberg Capital Partners is launching a new fund, the Blumberg Strategic Asset Fund and is again looking to acquire assets.
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New Study Released on the Non-Government Response to the U.S. Economic Crisis

/PRNewswire/ -- A new study shows America's foundations were swift, flexible and targeted in their response to the worst economic crisis since the Great Depression - using on-the-ground knowhow to make a significant impact. The study from The Philanthropic Collaborative (TPC) is the first of its kind to analyze the private-sector response to the crisis and shows that the federal government's response was not the only story.

"The ability of foundations to be swift and flexible in their response allowed them to modify their giving throughout the crisis and ensure the grants went to those most in need," said Doug Holtz-Eakin, author of the study. "During the U.S. economic collapse, we saw grant-making shift, expand and follow the larger unemployment and housing needs that developed and became acute in communities across the country. Even when foundations themselves faced financial stress from the very same crisis, our analysis shows a very clear shift in grant-making patterns to meet emerging economic needs."

The study analyzed a sample of 2,672 grants that totaled $472 million of foundation giving from 2008 to 2009, and early planned giving for 2010. In the area of preventing mortgage delinquencies and foreclosures, private and community foundations saturated their grant-making in states with higher than average delinquency rates. In 2009, for example, 95% of sampled grant-making, or $296 million, went to high-delinquency states. As unemployment became a larger economic problem between 2008 and 2010, the analysis shows foundations devoted more activity to states suffering higher unemployment.

"In the City of Detroit, we have found working with the foundation community has been beneficial for our community and our residents. The foundations allow the city to stretch current budget dollars to plan for the future while continuing to provide services to the residents," said Detroit Mayor Dave Bing. "The study by The Philanthropic Collaborative is representational of the impact foundations have on the City of Detroit," he added.

"Foundation grant-making is fundamental in helping to improve the lives of families during time of economic crisis," said Denver Mayor John Hickenlooper. "Private and community resources, when quickly targeted to local community needs, can play a major role in collective efforts to get local economies back on track. We have seen foundation giving in the Mile High City leverage positive social change with meaningful, measurable results."

"Some in our communities have been devastated by the economic crisis, which has taken a toll on municipal and state resources" said Providence Mayor David Cicilline. "While the responses from the federal and state governments are critically important, we cannot lose sight of the targeted and timely response from community foundations. Without their work, many more individuals and families would fall through the cracks in our system. Foundations are effective because they are part of our community, know the people, can bring aid to where it's needed most and act with speed and precision. They also embody another important attribute - they are able to provide assistance without the red tape and bureaucracy. This entrepreneurial approach is what makes them so effective and welcome in our efforts to ensure people have the means to weather this economic storm."

"I've said many times that government cannot do it all by itself. It must be a citizen movement," Toledo Mayor Michael Bell. "Organizations like to the Toledo Community Foundation and the Stranahan Foundation help provide aid during times of economic distress for people who may otherwise slip through the cracks. We have to be involved as a community and philanthropy plays a vital role in our ability to provide for our citizens."

"This study illustrates the critical role foundations are able to play in assisting Americans and communities in crisis," said John Tyler, Chairman of TPC. "As impressive and encouraging as this is, though, it is only part of the story because previous TPC research has told us that each dollar of grant support from these foundations can generate on average more than eight times that amount of value in direct, economic benefits," he added.

The study analyzed a sample of grants for the years 2008 to 2009, and early planned giving for 2010, obtained from the Foundation Center, which maintains the most comprehensive database of foundations' grant-making activities. The data provides information on the amount, activity and target audience of each grant. Grants averaged $176,608 but ranged from $500 to $5 million.

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Private Equity Leaders Confident of Full Economic Recovery

/PRNewswire/ -- Over half of private equity leaders are confident that the full recovery of the market is no more than 18 months away, new research commissioned by Celerant Consulting reveals.

A survey of more than 220 senior executives across Europe and the United States, carried out by the Economist Intelligence Unit, reveals that 53% of private equity leaders believe that the market will return to its pre-credit crunch levels within 18 months. The findings showed that US executives are more optimistic about the future than their European counterparts, with 62% of US respondents believing that a turnaround would occur within that time frame. As noted, the global sentiment was a bit more pessimistic, with 36% of UK and 32% of German respondents predicting a full recovery would take longer.

Paul de Janosi, Managing Director of Private Equity, Celerant Consulting, said: "Despite the optimistic viewpoint of a majority of the survey respondents, we feel that it will be a few years before we see pre-credit crunch levels of activity again. We expect the roots of early recovery to begin in the second half of 2009, leading to broader activity by mid-2010. The GP's will not be static though, as there is significant amount of portfolio remediation work and this type of market down-turn typically yields strong buying opportunities."

Yet to hit rock bottom?

Despite the long-term optimism, many of those questioned still felt that the market has further to fall. The vast majority believe both the volume and value of deals will reduce over the next year (78% and 81% respectively), whilst two thirds (66%) say they intend not to invest at the moment and would instead wait for more attractive deals.

Change is necessary, but how?

The survey also found that private equity leaders from around the globe are united in the belief that the credit crunch and subsequent recession will transform the industry, with 96% agreeing that PE firms will have to change. However, there is no consensus on what the sector will look like when the credit crunch has passed, highlighted by the fact that 16% acknowledge that there will be a need to change but they are not sure how.

One fifth thought that the industry would need to find a completely different financing model -- unsurprising given that the reduced levels of available credit in the marketplace means that the days of massive leveraging are a thing of the past. Almost as many, 19% globally and 29% US, expect the credit crunch to lead to consolidation within the private equity sector itself.

What to do in the meantime?

Nevertheless, despite acknowledging the need for change, only 20% are planning to scale back activity in the next 12 months, and a mere 2% intend to shed jobs. Rather, the optimistic long-term prognosis is illustrated by the fact that 26% of those questioned are prepared to take on new staff.

Paul de Janosi continued: "The credit crunch means that easy refinancing is a thing of the past, yet the private equity industry is still optimistic about the future. In the short term private equity companies have already begun to shift their focus from investment to improvement. They need to concentrate on their existing portfolios to ensure that they are both maximising their operational efficiency for short-term survival, and guaranteeing long-term growth."

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Wall Street's Collapse May Boost Private Equity Markets

The collapse of the housing and credit markets that has crippled some Wall Street giants is likely to have a variety of effects on private equity, say faculty at Emory University and its Goizueta Business School.

The fall of Lehman Brothers, the sale of Merrill Lynch to Bank of America, and the decision by Goldman Sachs and J.P. Morgan to be placed under the purview of the Federal Reserve are driving big changes in financial markets, note faculty members.

One likely shift is a larger role for private equity providers in financing big-ticket deals. But liquidity concerns are likely to rein in their appetite for risk, despite the just-passed $700 billion bailout package, add faculty.

"The consolidation taking place in the financial markets means the playing field is getting a bit smaller," says Thomas More Smith, an assistant professor in the practice of finance. "With fewer investment banking giants available to service big-company deals, we may see smaller private-equity firms swoop in to fill the empty spots."

In fact U.S. private equity firms have picked up the pace of their fund-raising, says the Private Equity Analyst newsletter, published by Dow Jones.

Domestic private equity firms raised $222.6 billion in 264 funds during the first three quarters of 2008, 11% ahead of the $200.4 billion raised by 298 funds in the same time last year, according to Dow Jones.

Distressed firms are seeing strong interest from investors with 18 funds raising $37.9 billion this year, up 28% from $29.5 billion raised by 16 funds at this point last year, according to the Dow Jones analysis.

The newsletter also reports that mezzanine, or layered financing funds attracted $36.9 billion across 13 funds, compared to $3 billion across nine funds through the third quarter last year.

But if the distressed and mezzanine-financing segments were excluded, private equity fund-raising would have been weaker compared to last year, says Jennifer Rossa, managing editor of Dow Jones Private Equity Analyst.

"Buyout fund-raising continues to lag," she notes. "And fresh concerns about the availability of debt won't help."

The credit crunch has still spooked investors and is likely to dampen their enthusiasm for some time, according to Goizueta’s Smith.

"Despite the bank bailout, we’re likely to see reduced capacity," says Smith. "The fact that there are fewer players remaining may also mean a pullback in the variety of services and niche activity that is offered."

Small businesses are finding it tougher to access credit, and that could spur a shift in the direction of venture capital, adds Smith.

"For the most part, VC firms have targeted ‘sexy’ businesses with high-growth potential, like technology companies," says Smith. "That’s in line with their traditional exit strategies that often envision a five-year exit with high returns."

But lately, venture capital providers have been shunning startups and have instead been targeting later-stage companies with a proven track record. That could open the door for more staid firms to catch VC’s eye, says Smith.

"A small but growing advertising company, say, may not offer the same potential as a high-tech business, but it may offer more security," he notes. "As their credit gets choked off, more small traditional businesses may begin to approach venture capitalists. And according to anecdotal evidence, some VCs are paying more attention to them. It’s too early to call it a trend, because we don’t have the data yet. But the potential is there."

A Shift in How Deals are Done

In fact Wall Street’s woes are likely to drive a big shift in the way deals are done, observes Lawrence M. Benveniste, a chaired professor of finance and dean of Goizueta Business School.

"The changes we’re seeing in the investment banking landscape are opening up huge opportunities for private-equity firms," he says. "I expect they will move in to fill the underwriting and other voids that are left as investment banks retreat. Amid the turmoil for example, Blackstone [a global corporate private equity group] has hired some high-level Lehman professionals."

On October 2, the Blackstone Group announced it took on a partner and two managing directors who formerly worked with Lehman Brothers.

Private equity already has a substantial presence in the world market, but as it expands its footprint, companies are likely to see significant changes in the way that deals are financed, says Benveniste.

"Many of the recent transactions have been driven by access to credit and the potential to increase returns through leverage. Leverage ratios of 80% were not uncommon," he explains. "Debt financing has not exactly disappeared, but it is a lot tougher to obtain it. Private equity is available, but I believe that the price-EBITDA multiples on deals will shrink considerably and opportunities for Leverage driven deals will disappear. Instead, deals will be driven more by the potential to add value to the purchased company. This is the traditional model of private equity."

Relating leveraged transactions to the current crisis in the markets, Benveniste remarks that the "The devaluation of much of this leverage debt has contributed significantly to the current weakness in financial institutions."

Klaas Baks, an assistant professor of finance at Goizueta and head of the Emory Center for Private Equity and Hedge Funds, agrees that private equity players may score some gains in today’s financial crisis.

"Many PE firms that rely on leverage to generate returns will need debt financing, but the tight credit markets will put pressure on them," he says. "In this type of market, successful PE firms will add value through channels other than leverage such as improved corporate governance or operational efficiencies."

He says that as investment banks like Morgan Stanley and Goldman Sachs take on the attributes of commercial banks, private equity firms and hedge funds will likely fill some of the void. "We may see private equity and hedge funds start to perform functions traditionally performed by investment banks," Baks predicts. "But if government regulation is expanded to private equity and hedge funds, such a move may be inhibited."

He expresses some concern about the bailout plan, noting that "at this point we just don’t know the true level of toxic debt."

Baks also questions whether a $700 billion taxpayer-financed bailout will lead to a "moral hazard," or more reckless behavior on the part of financial institutions that believe they are "too big to fail and will be bailed out by the federal government if they get into trouble."

Ray Hill, an adjunct professor of finance at Goizueta Business School, also believes that the problems on Wall Street may drive more activity to private equity firms.

"Private equity firms will be able to attract talent from investment banks," he says. "Also, some private equity firms that did not become overleveraged are already moving segments that were traditionally handled by investment banking firms."

But that does not mean that the investment banking segment is about to disappear from the landscape, adds Hill.

"Goldman Sachs is not about to go under," he says. "Instead the group is likely to retreat from its historical risk taking model. I expect Goldman will still engage in merger and acquisition, advisory and underwriting functions, but will probably limit its maximum leverage to 10x, instead of 25x. The company will make its money through smarter investments instead of just riskier ones."

Looking at a broader issue, Hill worries that the financial crisis is now infecting the real economy.

"The argument made for the bailout by [U.S. Treasury Secretary] Henry Paulson and [Federal Reserve Chairman] Ben Bernanke is that we have a crisis in part of the financial system that may spread to the general economy," says Hill. "At the time they proposed the rescue plan, you could say that the real economy was slowing down, but probably not headed to recession. In the last two weeks, the leading economic indicators have become more pessimistic and the current freeze in short-term credit is likely to do further damage."

He notes that the bailout plan is still a few weeks away from being implemented. "It is no surprise that we don't see the benefits of the plan yet, but some of the adverse consequences of the credit freeze will not be reversible."

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