Real Estate Private Equity Market and Recapitalization and Secondaries Overview

Jeffrey GillerManaging Partner and CIOClairvue Capital Partners

16th Annual Fischer Center Real Estate ConferenceMay 20 2011

2

Peak 10/2007 + 90%

THE UPCYCLE: The Rise Before The Fall

Moody’s Commercial Property Price Index (CPPI)Values Increase 90%

3Source: Private Equity Intelligence: Probitas Partners

Global Real Estate Fundraising 2000 and 201072% of All Fund Equity Raised Between 2005 and 2008

THE UPCYCLE: Overabundant Equity

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THE UPCYCLE: Misalignment of Interests

Investors and Fund Managers Took Extraordinary Risks to Drive Volume:

•Institutional Investors Chasing Yields - Increased Allocations To REPE Funds

•Mega-sized Funds Emerged

•Fees Surpassed Carried-Interest As Source of Wealth For Managers

•Rapidly Committing Capital and Getting to the Next Fund Became the Manager’s Incentive

•Managers Began Taking More Risk In Order To Place Large Amounts of Capital

5Source: Mortgage Bankers Association, LaSalle Investment ManagementNote: Data Based on MBA Survey and not comprehensive total origination volume, but indicative of relative levels of activity over time

THE UPCYCLE: Overabundant Debt

Change in Commercial Real Estate Debt OutstandingHalf of the Total Volume Was Issued Between 2005 and 2007

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Over Abundant Equity

+ Over Abundant Debt

Skyrocketing Prices + Excessive Risk

THE UPCYCLE: A Formula for Disaster

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Peak 10/2007

THE DOWNCYCLE: CRE Values Plummeted

Moody’s Commercial Property Price Index (CPPI)Values Fall 40%

8/2009 -40.6% from peak

8Source: Moody’s Economy.com, Federal Reserve Board, LaSalle Investment Management

THE DOWNCYCLE: Access to Credit Abruptly Halted

Net Borrowing as % of GDPIrresponsible sub-prime lending led to a collapse in the housing market

and a freeze in the global credit markets

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IN THE TROUGH: Recovery or Long, Flat Bottom?

Moody’s Commercial Property Price Index (CPPI)Values Hang at the Bottom

Peak 10/2007

Current (1/2011) -42.7% from peak

ATTRIBUTES OF REAL ESTATE PE SECONDARIES

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50%

100%

Inve

sted

Cap

ital

Optimal

Time

High Level of SpecificityJ-Curve Effect Mitigation

Hyper-DiversificationGeography Product Type

Secondaries

Primaries

The Sellers Reasons For Sales The Buyers•Public Pension Funds

•Corporate Pension Funds

•Endowments

•Foundations

•High New Worth Investors

•Private Equity Investors

•Corporations

•Portfolio Rationalization

•Reducing Manager Count

•Denominator Effect

•P & L Management

•Balance Sheet Management

•Liquidity Constraints

•Exiting Troubled Funds

•Other Limited Partners

•Secondaires Funds

•Primary Funds of Funds

•PE Secondaries Funds

SECONDARIES MARKET PARTICIPANTS

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SECONDARIES HAVE LITTLE OR NO VALUE IN A DOWNTURN

Change in NAV Relative to Change in GAV with 75% LeverageWith a 40% Peak to Trough GAV Decline, Levered Equity Is Deeply Underwater Today

GAV 100 95 90 85 80 75 70 65 60 55 50Cummulative Rate of GAV Decline 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%Leverage 75% 75% 75% 75% 75% 75% 75% 75% 75% 75% 75%NAV 25 20 15 10 5 0 -5 -10 -15 -20 -25Cummulative Rate of NAV Decline 0% -20% -40% -60% -80% -100% -120% -140% -160% -180% -200%

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SECONDARIES HAVE LITTLE OR NO VALUE IN A DOWNTURN

Late Vintage Funds:•Overpaid for and overlevered their investments•25% property value decline wipes out 75% levered equity

Early Vintage Funds:•Remaining assets are often the weakest•Remaining assets may have been written-up and refinanced•Managers may be in the carry or catch-up phase

Low Levered Core Funds•Low yields require deep discounting to drive high target returns

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SECONDARIES VOLUME SHOULD SLOW IN A DOWNTURN

The Bid/Ask Gap: Reported NAVs are Higher Than Market NAVs:•Managers have a natural owners’ bias •Write-downs can drive loan to value debt covenant breaches•There was scant transaction activity to apply as benchmarks•Reluctance to highlight poor performance relative to competitors’•LPs may not pressure managers to highlight poor performance

Buyers are Conservative: Nobody is getting kudos for making new investments in this market and making mistakes can be career ending

Sellers feel they are better off holding an option than giving their interests away

15Source: Landmark Partners, PERE

SECONDARIES VOLUME INCREASED IN THE DOWNTURN

Real Estate Secondary Transaction VolumeBeware of Falling Knives

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WHO BOUGHT SECONDARIES DURING THE DOWTURN?

Secondaries Transactions Consummated:

LPs purchasing interests from other LPs

Inexperienced third party buyers

LPs driven by need for relief from future commitments selling at deep discounts (or paying buyers)

Fund , GP and LP recapitalizations (not true secondaries)

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WHEN WILL THE REPE SECONDARY MARKET BE ATTRACTIVE?

When the bid ask gap narrows. This will occur when:

When it becomes clear that the real estate market is moving toward recovery

Foreclosures and REO sales occur on a massive scale to re-set pricing to intrinsic levels

When the credit markets fully rebound

18Source: American Council of Life Insurers, Federal Reserve, Real Point

THE DOWNCYCLE: CRE Delinquency Rates Spike

CRE Delinquency / Bank ChargeoffsDelinquencies Spike but Banks Slow to Foreclose– The Pain Has Yet To Be Felt

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WHEN WILL THE REPE SECONDARY MARKET BECOME ROBUST?

Clairvue’s Valuations as a Percentage of Manager Reported NAVManagers are Becoming More Realistic

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THE NEED FOR REAL ESTATE RECAPITAZLIZATIONS

Background

72% of the $500b of REPE Fund Equity was raised between 1999 and 2008 - 50% of the $1 trillion in commercial mortgage debt outstanding was issued between 2005 and 2007: Assets are over-levered and face maturing debt Assets need capital to deal with maturing debt as well as for capex and operations But commitments to funds are either fully drawn or expired – LPs have little interest in investing more capital into troubled situations - credit is still difficult to obtain

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THE NEED FOR REAL ESTATE RECAPITAZLIZATIONS

Defensive Needs

•Paying off maturing debt and funding equity gaps•Values have declined 40% to 50% and LTVs from 80% to 65%•$230 billion required to fund equity gap for the $1 trillion in maturing debt and $50 billion for the $125b REPE fund debt

•Paying Down Maturing Debt To Secure Term Extensions

•Covering Property and Fund-Level Carrying Costs

•Buying-out or Covering Obligations of Defaulting Partners

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THE NEED FOR REAL ESTATE RECAPITAZLIZATIONS

Offensive Uses

•Buying Back Debt At Discounts

•Executing Value Added Business Plans

•Making Opportunistic Acquisitions

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THE NEED FOR REAL ESTATE RECAPITAZLIZATIONS

Potential Sources of Capital

•Limited Partners Undrawn Commitments

•New Commitments From Limited Partners

•Traditional Lenders

•Liquidating Assets

•Third Party Specialists

Real Estate Private Equity Recapitalization and Secondaries Market Overview

Jeff GillerManaging Partner and Chief Investment OfficerClairvue Capital Partners

EWMBA 284University of California, BerkeleyHaas School of BusinessApril 28, 2010