Addressing 'A Very Big Problem in the Marketplace'

NEW YORK CITY—“The problem is enormous with regard to liquidity,” Real Liquidity CEO Kevin Guy says of the private commercial real estate investment market. “Through our own research, we think that seven or eight out of 10 of these syndicates require liquidity at some point in their life cycle. When you're dealing with an asset class that's somewhere in the $5-trillion to $8-trillion range, it's a big number, and it's a very big problem in the marketplace.”

The “very big problem” is the inability of general and limited partners to exit a fractional ownership in a syndicate quickly or efficiently. Limited partners may approach the general partners and ask about buying out their share. Failing that, “they would have to go out into the market—by which I mean their cousin Joe—and say, 'Would you be interested in taking out my position?'” Guy says. “This of course is very inefficient, and in almost every case they take a significant discount. What we're trying to provide is an efficient marketplace, where there's not a single investor that may be interested—there could be tens, hundreds, and in the future there could potentially be thousands that are interested in that particular limited partner position.”

Described as the “real estate-centric secondary market,” Real Liquidity provides an online market for selling such positions. The startup venture has its origins in founder Guy's long experience in pioneering technology for commercial real estate, and in the aftermath of the 2008 capital markets crisis. “Going back to '08, everybody focused quite heavily on the residential side, but what we witnessed on the commercial side was the reality of the illiquidity of the marketplace,” he recalls.

Over the subsequent years, says Guy, “the idea began to germinate: how do we create a pool of liquidity and create access for investors that would be interested in taking on some of these limited partner positions when they require liquidity? And on the other side, of course, how do we create that same liquidity for LPs and sometimes GPs that require it at some point in the life cycle of that particular asset?

“A year and a half ago, we started to move down the road with regard to putting together a framework of how to establish that pool of liquidity,” he continues. “What we established is something resembling a stock exchange. To be clear, we're not a traditional stock exchange; we deal in private securities. But we figured out that these were private securities, no different than they would be in a private company.” Accordingly, Guy and his team determined that “if we did the same sort of on-boarding process as taking a private company public, with the same due diligence and discovery of details surrounding that asset, we could provide that sort of transparency to an investor that may be interested in taking on that limited partner position.”

When a syndicate approaches Real Liquidity, “we do our due diligence and compile as much information as possible, then we load it into our system with as much visibility and transparency as we can provide,” says Guy. “Then on the other side of things, we have a pool of accredited investors, north of 10,000, and we show them this opportunity. We want high-quality assets, great management teams, great sponsors and a yield-producing, stabilized asset. We typically don't focus on ground-up development and things of that nature at this point.”

With regard to ground-up projects, “I think there's a place for that in the future,” Guy says. “That is typically a primary offering. You see some of the crowdfunding sites out there doing that, and that's center of the plate for them. We're not a crowdfunder; we only trade in the secondaries, between shareholder and shareholder. I don't want to box us out of primaries in the future, but when you're dealing with a $5-trillion plus market, we certainly have our hands full for the foreseeable future. Without doing a lot of marketing, we have a lot of incoming deal flow.”

NEW YORK CITY—“The problem is enormous with regard to liquidity,” Real Liquidity CEO Kevin Guy says of the private commercial real estate investment market. “Through our own research, we think that seven or eight out of 10 of these syndicates require liquidity at some point in their life cycle. When you're dealing with an asset class that's somewhere in the $5-trillion to $8-trillion range, it's a big number, and it's a very big problem in the marketplace.”

The “very big problem” is the inability of general and limited partners to exit a fractional ownership in a syndicate quickly or efficiently. Limited partners may approach the general partners and ask about buying out their share. Failing that, “they would have to go out into the market—by which I mean their cousin Joe—and say, 'Would you be interested in taking out my position?'” Guy says. “This of course is very inefficient, and in almost every case they take a significant discount. What we're trying to provide is an efficient marketplace, where there's not a single investor that may be interested—there could be tens, hundreds, and in the future there could potentially be thousands that are interested in that particular limited partner position.”

Described as the “real estate-centric secondary market,” Real Liquidity provides an online market for selling such positions. The startup venture has its origins in founder Guy's long experience in pioneering technology for commercial real estate, and in the aftermath of the 2008 capital markets crisis. “Going back to '08, everybody focused quite heavily on the residential side, but what we witnessed on the commercial side was the reality of the illiquidity of the marketplace,” he recalls.

Over the subsequent years, says Guy, “the idea began to germinate: how do we create a pool of liquidity and create access for investors that would be interested in taking on some of these limited partner positions when they require liquidity? And on the other side, of course, how do we create that same liquidity for LPs and sometimes GPs that require it at some point in the life cycle of that particular asset?

“A year and a half ago, we started to move down the road with regard to putting together a framework of how to establish that pool of liquidity,” he continues. “What we established is something resembling a stock exchange. To be clear, we're not a traditional stock exchange; we deal in private securities. But we figured out that these were private securities, no different than they would be in a private company.” Accordingly, Guy and his team determined that “if we did the same sort of on-boarding process as taking a private company public, with the same due diligence and discovery of details surrounding that asset, we could provide that sort of transparency to an investor that may be interested in taking on that limited partner position.”

When a syndicate approaches Real Liquidity, “we do our due diligence and compile as much information as possible, then we load it into our system with as much visibility and transparency as we can provide,” says Guy. “Then on the other side of things, we have a pool of accredited investors, north of 10,000, and we show them this opportunity. We want high-quality assets, great management teams, great sponsors and a yield-producing, stabilized asset. We typically don't focus on ground-up development and things of that nature at this point.”

With regard to ground-up projects, “I think there's a place for that in the future,” Guy says. “That is typically a primary offering. You see some of the crowdfunding sites out there doing that, and that's center of the plate for them. We're not a crowdfunder; we only trade in the secondaries, between shareholder and shareholder. I don't want to box us out of primaries in the future, but when you're dealing with a $5-trillion plus market, we certainly have our hands full for the foreseeable future. Without doing a lot of marketing, we have a lot of incoming deal flow.”