The story of 2023 for private equity was the ultra-high costs of financing, driving up interest rates and bringing dealmaking to a virtual standstill in many markets. There’s no quick fix for the ‘higher-for-longer’ adjustments being made by investors and market analysts. But the best way forward, according to some of Bay Street’s best PE firms, is to maintain equilibrium by finding opportunities in distressed assets.
For the real estate industry, this translates to distressed sales due to mortgage defaults, foreclosures and bankruptcy resulting from high costs of capital. There will be reduced prices on properties with inherent value, offering significant returns if managed effectively. But these investments involve a level of risk that would be unacceptable in most other market conditions, requiring a level of trust in fundamental assessment skills that few advisors have rightfully earned.
One of those who has is Marrisa Holding’s Mark Litwin. With over two decades of investment experience with a focus on real estate development in Toronto, Litwin has learned some key lessons in due diligence and assessment requirements.
“With the marked deepening of higher interest rates, we’re seeing increasing opportunities when firms with sound fundamentals in both talent and assets decide to restructure,” says Mark Litwin. “It’s requiring a recalibration for most firms, including ours. But we feel that plays into our strengths.”
There will continue to be a shortage of capital in the short term, creating more challenges for real estate companies. Particularly in Toronto, with robust economic fundamentals and high predictions for the industry, the demand for capital for both residential and commercial spaces will continue unabated. This demand is particularly strong in the luxury residential market and the commercial spaces catering to the tech and service sectors.
With increasing regulations for sustainable practices, investors are looking for firms that have created the infrastructure and knowledge to meet these regulations in a cost-effective manner. These properties also have premium interest from potential buyers and tenants.
“As the city evolves, so do opportunities for adaptive reuse and urban redevelopment,” continues Litwin. “Particularly downtown, older buildings are transformed into mixed-use properties. These are the kinds of assets we’ll prioritize when partnering with real estate firms.”
These investments align with a broader trend of urban revitalization, a reliable driver of development for Toronto’s core.
The risks to manage for the short term include potential regulatory changes, continuing interest rate fluctuations, and the broader economic impacts of global events. Private equity firms are adopting more flexible strategies, diversifying their portfolios, and focusing on asset management to mitigate these risks.
With a combination of strong market fundamentals and more unique investment strategies, private equity can expect to find some intriguing opportunities for those willing to navigate its complexities.
“As entrepreneurs ourselves, there’s a part of us that relishes the recalibration,” says Litwin. “We’re looking for the niche opportunities that make sense for us based on our history in the market.”