London-headquartered emerging markets manager Actis’ purchase of Standard Chartered’s real estate investment business in Asia, Principal Finance Real Estate, has led to a doubling of its overall real estate business to around $1 billion of assets, PERE has learned from sources familiar with the transaction.
Through the acquisition, officially announced this week, Actis has effectively taken ownership of PFRE’s portfolio of seven real estate investments in the region and its entire team of 20 real estate professionals. Brian Chinappi, who headed Standard Chartered’s PFRE business, will stay on as partner and head of Asia for Actis. The two other partners are Thomas Liu, who will continue on as head of Greater China and north Asia, and Ashish Singh who will remain in charge of the India operations.
“Asia’s investable universe for real estate is forecast to become the world’s largest, rising from 28 percent at the end of 2016 to 35 percent of the global total by 2026.”
Executives at both firms declined to comment on the financial aspects of the deal. However, PERE has learned the capital for the transaction was raised from third-party institutional investors. In addition, according to one source, Actis is still in the process of raising institutional capital to fund a pipeline of further assets, which PFRE was considering as possible acquisitions, to build its scale in Asia.The transaction, whose acquisition value was not disclosed, marks a real estate debut for Actis in Asia. The firm has deployed around $3 billion through energy and private equity deals in the region since it was founded in 2004. However, its real estate exposure until now was limited to Africa, where it raised over $500 million in June 2016 for the biggest ever institutional fund in the continent at the time.
Calling the acquisition a natural fit for Actis, Andrew Newington, the firm’s chief investment officer said: “Asia’s investable universe for real estate is forecast to become the world’s largest, rising from 28 percent at the end of 2016 to 35 percent of the global total by 2026. The scale of this opportunity, combined with Asia’s strong demographic and economic fundamentals, has created an attractive environment for real estate investment in the region.”
“In the past, we [PFRE] focused on backing the highest quality operating partners in the region and providing strategic value and capital to them. It is best described as an opportunistic strategy, although we do have a heavy focus on build to core as well,” added Chinappi. “That is a strategy we will continue to employ going forward.”
With this sale, the UK-based bank Standard Chartered is one step closer to fully exiting its entire principal finance business. The decision to exit the business, which invests the bank’s own balance sheet as well as third-party capital, was made in late 2016. According to Reuters, the business had reported an operating loss of $217 million in 2016, while gains and losses were not included in the 2017 financial performance data.
According to news reports, London-based manager Intermediate Capital Group (ICG) is in talks to acquire the private equity part of the business. Standard Chartered has not confirmed that sale as of yet.
On asked why the private equity and real estate businesses were being sold separately instead of the entire business being bought by one multi-asset manager, Chinappi said: “When we embarked on what was a collaborative process with the bank to spin out the real estate business specifically, our key objectives were to find a new home that was a strategic fit, shared our operationally intensive and hands on approach to investing throughout the region, and a general understanding of the markets we operate in. Actis ticked all those boxes.”
“From the real estate perspective, the process did become simpler as a result of having just one investor.” Brian Chinappi
Notably, there is also a key distinction between Standard Chartered’s private equity and real estate investment business. Real estate investments were solely made from its principal books while private equity deals were also made through capital raised by third-party investors.
“From the real estate perspective, the process did become simpler as a result of having just one investor,” Chinappi agreed.
From the inception of the business in 2010, the firm is understood to have invested a little over $1 billion in real estate deals in Asia. Around a third of those have been in China, a third in India, and the rest in Korea and Southeast Asia combined. One of the firm’s recent deals was the acquisition of a mixed-use development site in Seoul, made in partnership with local operating partner GS Retail, for $43.5 million, in March 2017.
Up until the time of the transition to Actis, the firm had exited about half of those investments.
There was no attempt made to sell any of the remaining assets individually.
Explaining the approach, Alfredo Lobo, partner at the real estate advisory firm Hodes Weill, which advised Standard Chartered on the transaction and was the capital arranger for the deal, said: “You preserve the highest value ultimately by not breaking up the portfolio and selling it piecemeal. In addition, the portfolio had seven assets spread across three countries. It is not the easiest thing to sell on a piecemeal basis. This was deemed as the best execution.”
The portfolio also includes residential development projects in India, which have seen a slowdown in the residential sector because of recent regulations, including the government’s demonetisation exercise in late 2016.
However, performance did not play a role in dragging down the final selling price of the portfolio. PERE understands that PFRE has generated opportunistic returns on the fully realized track record of investments.
“This was by no means a distressed asset sale,” Chinappi stated, while declining to comment on specific returns. “This was a strategic decision around the original owner to exit the business and the portfolio was highly performing.”