There is significant jockeying for position in what is turning out to be a radically altered commercial real estate investment and finance landscape. The interests of mortgage investors and those of real estate owners are fusing together more than ever before.

Private equity real estate investment funds have swiftly become the most viable source of capital to either acquire troubled mortgages or to rescue distressed properties. And the investor participants in these funds — the limited partners — are themselves becoming the target of opportunity investors seeking to capitalize on market distress.

Here's how it works: An investment firm such as The Blackstone Group opens a fund to qualified investors. The firm serves as the general partner, and the investors, the limited partners. Both participate in the leveraged acquisition of mortgages and properties using debt and pooled funds.

Adverse market conditions today leave these partners holding real estate or mortgages that are either illiquid, or that would result in substantial losses if sold. Thus, capital withdrawal requests are now pushing partners into distress.

Opportunity buyers now want to participate in the lucrative secondary market by purchasing the holdings of limited partners at distressed prices. And these buyers, as well as their service providers, are sparing no expense to acquire the best available talent to pull this off.

Talent search

Recently, New York-based SecondMarket Inc., a trading desk for hard-to-sell debt and securities on the secondary market, proudly proclaimed that L. William Seidman, former chairman of the FDIC from 1985 to 1991 and former chairman the Resolution Trust Corp., has joined the firm as senior adviser.

Seidman received much acclaim for advising former presidents Ronald Reagan and Gerald Ford, and overseeing the management of more than $400 billion in troubled assets through the RTC. SecondMarket is now tapping Seidman's history to gain position in the troubled loans trading business.

What is interesting is that SecondMarket's announcement came only after the Treasury abandoned plans to purchase troubled loans and securities from financial institutions. At the time of the announcement, SecondMarket didn't have an active program to trade illiquid mortgage-backed securities.

Anticipating distress

It is widely believed that the Treasury's decision means less competition for opportunity investors, who appear to be targeting mortgage notes. The very basis for new funds being allocated to buying defaulted commercial and residential mortgages is that there will be a bevy of such opportunities in coming months.

This anticipation is driving optimism among scavenger investors. Lenders are seeking to clear loans from their balance sheets, and various hedge and private investment funds are actively working to free up capital and satisfy investors' requests for withdrawals.

This capital will originate in the private equity secondary market where opportunity investors want to buy up the interest of struggling limited partners at steep discounts.

Companies like San Francisco-based Liquid Realty Partners have been building their capabilities in anticipation of a wave of secondary market opportunities. Liquid Realty had been ramping up its talent since August, and recently hired John Graham, former executive manager of a SL Green/Gramercy Capital joint venture, to join its acquisition team. The firm will pursue limited partners facing requests for capital withdrawal and fewer borrowing options.

The secondary market, the venue of the recent standoff in loan purchase and sale, is now the best exit strategy for fund investors. Indeed, Landmark Partners, a private equity investment firm, is seeking to raise some $750 million to establish what would be the largest secondary market real estate fund to date.

So expect to see more distressed buying in the secondary market rather than in primary asset purchases. This may well explain why there have been few reports of distressed assets so far. It may also explain why many distressed debt investors are having a tough time deploying capital from their trading accounts.

W. Joseph Caton is managing director of Oxford, Conn.-based Hartford One Group, a real estate finance consultant.