Frustrated institutional and accredited investors who want to trade shares of the popular Starwood Real Estate Income Trust—a private real estate fund which was closed to redemptions in December, after outsize withdrawal requests—will have a new option starting today: the alternative trading system LODAS Markets, an online platform based in Overland Park, Kan., formerly called Realto, has been cleared to start trading the shares.
“This gives SREIT investors immediate access to liquidity in those shares,” said Randy Williams, a LODAS spokesperson.
In early December, Miami Beach, Fla.-based Starwood Capital “gated” redemptions of its private real estate fund because withdrawal requests had exceeded the fund’s strict limits of not more than 2% of its net asset value per month or 5% per quarter. Gating redemptions is considered a necessary safety mechanism, not a sign of trouble, as it protects investors against forced asset sales to meet liquidity obligations. It’s one of the reasons some investors considered private funds like SREIT the gold standard in the real estate space.
Since its inception in 2018, SREIT has returned 12.8%. Last year alone it returned 6.28%. It’s estimated to be worth $14.6 billion.
“Investors feeling stuck [after the gating announcement] now have a liquidity lifeline,” said LODAS CEO Brian King, in a press release. “Our platform gives these investors—and other owners of unlisted, private real estate securities—access to related buy-side investors.”
In an email, King explained that LODAS, an acronym for Liquidity on Demand As a Service, “matches buyers and sellers like a stock exchange.”
Sellers don’t have to be accredited investors, but buyers do—meaning they fit the SEC definition by being sufficiently financially sophisticated and not needing the same degree of regulatory protections as ordinary investors. Most are high net worth individuals or institutions.
“Most buyers on the platform are institutional investors, including hedge funds and insurance companies,” he said. “These buy-side participants purchase many nonlisted REITs, business development companies, and other illiquid real estate investments.”
That’s where the liquidity comes from, King added—from these buyers.
As an alternative trading system (ATS), LODAS is regulated by the SEC, though not to the extent that an exchange is regulated. It must register as a broker-dealer, so it’s regulated by Finra, and it must periodically file detailed reports about operations, potential risks, and potential conflicts of interest.
ATS’s don’t just trade private, alternative investments; they also match large buy and sell orders of listed securities. Institutional investors often use an ATS to shield their large transactions from public view, so their trades don’t impact market values.
After trading opens, shares of SREIT—like all other unlisted investments on the platform—will trade at whatever value the bids and offers reflect, said King, regardless of the prices listed on the SREIT website. He acknowledged, however, that “it’s hard to say exactly what the execution prices will be on LODAS.”
The service charges sellers a fee of between 2% and 2.9% to complete each transaction, but King doubts the final price will be at a premium. “It’s likely there would be a modest discount,” he said.
In trading, timing is everything. In its press release, LODAS claimed that trades are “settled in as little as three days," but King conceded that “settlement timing can vary.” Trades, he said, are executed instantly upon matching buyers and sellers—that is, when they agree electronically on a price—but because these transactions aren’t cleared through the Depository Trust and Clearing Corp. (which settles most securities transactions in the U.S.), the timing “usually takes three to five days,” he said.
This, he pointed out, is a big improvement from traditional, nonelectronic trades of private securities, which often took a month or more to settle. “Part of the impetus to start LODAS was to make this market more efficient than it has been,” said King.
LODAS has been operating for a little over a year, he added, and has so far executed trades in 40 different securities with volumes of up to $1 million in value within a single week.
“That said, this is a nascent market and few investors and advisors are aware that there is actually an opportunity to get liquidity in often illiquid securities,” said King. “That's what we're trying to change.”
The platform hopes to open trading of Blackstone Real Estate Income Fund (BREIT), which was also closed to redemptions last December, in the near future.
Article courtesy of Financial Advisor Magazine
LODAS Securities, LLC Member FINRA / SIPC - LODAS Securities, LLC is a wholly subsidiary of LODAS Markets, Inc.
The information provided herein does not constitute an offer to sell securities or the solicitation of an offer to buy securities, which can only be made by the applicable offering document filed and registered with the appropriate state and/or federal regulatory agencies and sold by broker dealers authorized to do so. There is no guarantee that a market will develop for some securities, and as a result, they may remain illiquid.