How Real Estate Private Equity Bid Processes Work

How does a real estate private equity bid process work? When a company decides to sell itself, or a portfolio of its assets, or something else, how does the process take shape? This post will seek to provide a high-level overview of a common feature of investment-focused real estate private equity jobs: the bid process. No two bid processes are exactly the same, but they’re all quite similar. So first, let’s think of who the seller might be.

Public Company Seller

First option, the seller could be a public company whose board of directors has decided it is time to search for “strategic alternatives.” Whenever a public company says it is going to search for strategic alternatives, it just means it is trying to sell itself. There are a number of reasons why a company might try to sell itself. Perhaps it has backed itself into a corner with too much leverage. Perhaps it believes the public markets are not valuing it highly enough, and a bidder might take the whole thing out for a nice premium.

Whatever the case, public company transactions are often the most intense because you have to purchase the entire corporate entity, not just the assets. Legally speaking, this brings a whole suite of potential liabilities. Say the company did something five years ago and gets sued for it when it comes to light. Well, as the proud new owner of that company, you are now the one getting sued.

Additionally, you might have to pay a hefty set of change-of-control fees for various reasons. Corporate debt and preferred equity financing typically has change-of-control provisions that demand sizable premiums. Also, management is often promised severance packages that give them a nice payout when a company gets bought out. Long story short, buying a public company gives you the whole shebang but not without an entire barrage of unique headaches.

Private Equity Seller

Your seller could also be another real estate private equity firm. These sellers are often motivated because their fund life is coming to an end. Perhaps there is some distress, that’s always a possibility. But the motivating factor for a sale is usually to cash in on a return, or to offload an under performing asset.

Whatever the case, a real estate private equity firm might sell either a full corporate entity with similar headaches to a public company sale, or it could just sell assets as a portfolio. As a buyer, you would almost always prefer the portfolio sale to the public company sale unless you’re interested in acquiring the management team. You’d want to buy the management team if you’re trying to enter a sector to which you have little exposure. But if you’re buying a portfolio of assets for which you already have a platform in place, you would almost always opt in for the portfolio sale.

Stay tuned for a continuation of this post!

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