Inside Alts: Bridgepoint sees opportunity in 're-rated' real estate

While higher interest rates are chasing many investors away from real estate, Bridgepoint Group sees growing opportunity in overlooked corners of the property market, according to company executives.

With $125 billion in assets, London-based Bridgepoint has expanded from core private equity and private credit into infrastructure, secondaries and real estate. This summer, it announced the acquisition of Kayne Anderson Real Estate, the real-estate investment firm with over $22 billion in assets.

In an interview with Inside Alts, Bridgepoint CEO Raoul Hughes said the acquisition gave the firm a "category-killing" real-estate offering as well as a bigger foothold in the U.S.

"All the products we have are the go-to products within their niche," Hughes said. "They're very entrepreneurial, very alpha-driven and we're all about real value-added investing. What we didn't have prior to coming together with Kayne Anderson was the real-estate piece."

Higher interest rates have created a new headwind for many real-estate funds. Funds that poured money into commercial and residential real estate in 2021, when interest rates were near zero, are now grappling with higher borrowing costs, compressed valuations, slower transaction volumes and more defaults.

Al Rabil, CEO and Co-Founder of Kayne Anderson Real Estate, said higher rates will lead to a shake-out in the industry. Disciplined investors with strong sector expertise will find new opportunities in the fallout, he said.

"People say 'oh interest rates up, real estate bad,'" Rabil said. "It's actually not quite that simple. Yes, interest rates are up, cap rates up, asset valuations down. But this is a longer duration investment business so it isn't day-to-day or quarter-to-quarter. When you get in an environment like the one we're in, it actually produces a very outsized investment opportunity because we're in very rarified air."

Rabil cited three real-estate sectors as being attractive for Bridgepoint and Kayne Anderson. Medical office space will continue to be an outperformer as the population ages. He said the asset class hasn't been below 90% occupancy in over 20 years, with demand far exceeding supply.

He said Kayne Anderson focuses specifically on the higher-margin sub-sectors of oncology, neurology, cardiology and diagnostics.

"People age 65 or over need seven times more doctor visits than those 45 and under," Rabil said. "So the population has a massive need for increased health care that has to be satisfied through medical office."

Another attractive sector is so-called "small-bay industrial," or commercial space used by small businesses and e-commerce retailers.

"Small businesses are 47% of GDP," Rabil said.

When it comes to residential, Rabil said higher interest rates could cause a reckoning. Investors poured billions into multi-family real estate in 2021 and 2022, with many of those loans financed with a 10-year Treasury at around 1%.

"Much of that debt is coming due today," he said. "There is a huge opportunity for very good assets that are structurally broken, in terms of the capital structure."

Hughes said that higher rates aren't likely to impact Bridgepoint's broader portfolio companies in private credit and private equity. He said the firm focuses on high-growth, high-margin businesses that are more resilient to interest rate swings.

"You'd rather rates were stabilizing where they are rather than going up," Hughes said. "And I think rates probably are stabilizing. But from an investing perspective, I don't think it materially damages our ability to drive returns from our equity portfolio."