NEW YORK CITY—Thanks in part to holding periods that have gone on longer than anyone anticipated,  Madison International Realty's “direct secondary” differentiated investment strategy for core commercial real estate has been highly successful in fast-changing markets. The New York City-based private equity firm has fully invested its $825-million Fund V just a year after closing—and exceeding its $750-million target—and has already begun a capital raise for Fund VI, targeting $950 million in equity. GlobeSt.com caught up with company president Ronald Dickerman last week to get his take on where the opportunities are.

GlobeSt.com: With values in many instances ahead of 2007, what would motivate investors to seek out capital partners rather than just exit?

Ronald Dickerman: We actually had a record year last year for capital deployment. Ww invested almost $500 million in capital and probably $1.5 billion on the run rate of one of our investment vehicles. The reason we had such a dynamic year is that under the surface is deal fatigue. A lot of sponsors thought they would sell their assets and create liquidity for their investor base in 2013 or 2014. Many investors put up money in these structures pre-credit crisis. So they're already up to the 10-year anniversary of their investments. Underlying sponsors may have said a couple of years ago, “we're going to outsmart the markets. We're going to sell our buildings in 2014 to avoid interest rate spikes and cap rate increases,” and that's the cue that the underlying investors were looking for.

Fast forward to May of 2015, and it hasn't worked out that way at all. The economy is getting stronger. Interest rates have stayed lower than anyone expected, oil prices have fallen 50%, and now sponsors are saying, 'I'm going to hold my building until 2017, 2018, because I think this economy has more room to run.' And underlying investors are saying, “wait a minute. I've already owned this thing for 10 years, the sun is shining really brightly on the real estate market,  I want an exit strategy.”

We're seeing a lot of end-of-life situations where investors have just owned it for too long and the sponsors are looking to recapitalize or to take on a new equity partner to allow them to hold the asset until the end of this value creation cycle. We probably see five to seven of these end-of-life situations per week.

GlobeSt.com: In terms of homing in on opportunities, whether end-of-life situations or otherwise, what will make you commit to a particular opportunity?

Dickerman: We have a very tightly defined transactional box. We look for prime assets in major US gateway cities. We also invest in London and key capital cities in Western Europe. We have offices in New York, London and Frankfurt. We invest in CBD office; we love retail, urban infill retail and grocery-anchored retail, and we invest in higher quality multifamily assets.

Those are our food groups and our geographies. We're looking for assets that fall into those categories where the entry point is a cooperative investment with sponsorship to either replace an existing capital partner or provide some liquidity to the sponsor itself in order to let them go do something else with the capital or take some chips off the table.

So why are counterparties doing business with us? What we find is, we create optionality in their holding period decision. So many investors don't want to make that binary decision: do I sell it in its entirety or do I hold it? We allow them to make a hybrid decision.

GlobeSt.com: Comparing the US and Europe, what watchwords apply in Europe that you don't necessarily have to factor in here?

Dickerman: Obviously they had a significant crisis within the euro zone, going back three or four years. What we found fascinating is that back in that day, very few US investors were interested in playing the European market. It was only after the euro stabilized that the light switch flipped and US investors started pouring money into Europe. We were investing there all along, knowing that Germany was the anchor of our investment activity.  For example, we took a 50% stake in the Trianon office tower in downtown Frankfurt, which is the home of DekaBank, immediately next to Deutsche Bank world headquarters. We bought it from a distressed German open-ended fund.

But our risk model is different in Europe. We're buying prime, class A real estate in gateway cities and taking very lease expiration risk. We're trying to buy long-term leases so we can harvest a strong dividend yield and buy interest from distressed sellers.

GlobeSt.com: Where are you seeing especially attractive opportunities in the US?

Dickerman: We're investing in the Saks Fifth Avenue store in San Francisco, which is a major trophy asset in Union Square. We're providing liquidity to a series of German closed-end fund investors who have owned the building for quite some time. We just made a pretty significant investment in Monogram Residential Trust, which is now a public REIT, formerly a private REIT, that owns one of the highest quality multifamily portfolios we've seen in the US. We're currently the single largest shareholder in that entity. And we see historically have made investments in buildings in Downtown Los Angeles. One California Plaza is one of our portfolio holdings. More recently, we made an investment in 555 Fifth Ave., which is a 250,000-square-foot office building two blocks from Rockefeller Center.

We're sticking to our knitting. We're looking for prime, in some cases ultra-prime, assets in these gateway US markets. There's a lot of buzz about going to second- and third-tier markets and chasing yield. We think that's a mistake. Investors did that back in 2007, and they realized that prime buildings and prime markets hold their values the best in down cycles and recover most quickly in up cycles. We don't invest in second- and third-tier cities.