How Gaw Capital is expanding its private equity exposure

Gaw Capital Partners has committed over $100 million in private equity deals from its latest $2.2 billion pan-Asia opportunistic real estate fund as the real estate firm grows its exposure to the alternative asset class.

The firm told PERE it has invested in three private equity deals from Gateway Real Estate Fund VI, which has raised $2.2 billion equity and an additional $800 million via co-investment sidecars.

The fund was launched in 2018 with a $2 billion hard-cap. The same year, the firm made an investment in the Chinese co-living operator Harbour Apartments and this year invested in the Chinese online-to-offline healthcare provider Tencent Trusted Doctors, as well as the Chinese online-to-offline residential property services platform Beike.

Gaw’s investment strategy for its latest fund and associated co-investments includes thematic platforms in education, healthcare and data centers, as well as co-sharing concepts, as PERE reported.

Christina Gaw, managing principal and head of capital markets at Gaw Capital Partners, told PERE that the motivation for more thematic investments came from the success of Gaw’s logistics platform, which was introduced in 2014 and has now grown to over $2 billion in gross asset value.

“We invest in real-estate-related opportunities and that is actually quite a wide range of investments, given that almost all activities, such as shopping, education, entertainment and healthcare, ultimately need a suitable space to carry out or enhance the experience,” said Gaw, explaining the firm’s rationale behind venturing into private equity investing.

“It is all about creating innovative platforms. And a lot of times, there are both the operating side and the real estate side in these innovative businesses.”

Gaw declined to comment on its private equity allocation and the size range of the deals it would undertake in the space, but the firm is understood to be targeting around 25-30 percent returns from them.

For the whole of Fund VI, the firm is aiming at high-teen returns. Meanwhile, the predecessor Fund V has made one exit and is generating a 20 percent IRR, according to a PERE report.

Aligning strategy with new consumer demands

The Hong Kong-based firm first ventured into the private equity space two years ago, investing in real estate-related operating companies from its own balance sheet, according to Humbert Pang, the firm’s managing principal and head of China.

It also started using its opportunistic real estate funds’ capital to invest in the asset class. The firm invested a total of $57 million in two private equity deals – Chinese co-working start-up Naked Hub and Harbour Apartments – from its $1.3 billion Fund V, which closed in 2017. Gaw re-upped its investment in Harbour Apartments from Fund VI.

Gaw Capital can now effectively use different pockets of capital, including funds, balance sheet and co-investments, to back a single private equity deal. But the firm only invests its real estate fund’s capital in a private equity transaction once an operating company has grown to a certain scale and acquired hard assets, Gaw said.

In one example, the firm first backed Tencent Trusted Doctors using its own balance sheet in early 2016 and only invested in the company using Fund VI’s capital this April. Tencent Trusted Doctors currently has 50 physical clinics and outpatient surgery centers and over 1,000 health kiosks in operation.

Pang told PERE the firm is now also investigating emerging opportunities in the proptech sector. In February 2019, Gaw hired former Microsoft director Bill Lee as a senior director to advise the firm on proptech investments and real estate development.

“We believe technology will further enhance real estate industry development. Property investors that have already invested on our funds also found that there is demand for more efficient use of time and space,” Pang said.

In terms of exit plans for its private equity investments, Pang said options could include trade sales, initial public offerings or secondary market sales, such as with Naked Hub. In 2016, Gaw led a $33 million fundraising round in the co-working start-up and reportedly sold it to WeWork for $400 million two years later, according to Bloomberg.

Gaw is not the only real estate firm to venture into private equity investing. In 2018, the Singapore-based logistics giant GLP launched a $1.6 billion logistic private equity fund. The same year the real estate arm of Hong Kong-based investment manager PAG also invested in the Chinese flexible office space operator Atlas.

While there are limited examples of real estate firms in Asia expanding their investment scope, the question is whether investors are willing to endorse such forays and take on the higher risk inherent in private capital and venture capital deals.

Henry Ching, head of Asia real estate at investment consultant firm Mercer Investments, told PERE that the return distribution for private equity deals is much wider than real estate investments – some PE deals can generate return as high as 10 times and more, or as low as zero. For real estate investments, the expected return is generally lower in exchange for a tighter and more stable distribution of returns.

Ching added that most investors usually tend to commit to traditional private equity funds when they are looking at private equity investments.

“Your best value is to bring in deals and run those deals in your specialty,” said Ching. “However, investors can be interested in investing with a real estate firm if the manager has access to certain exclusive private equity deals through their tenants’ network. But they should be considered as the exception, not the norm.”