THE CLSA SAGA
See more of our coverage of Pattar’s departure and what it means for CLSA below
Everything was looking so rosy. CLSA Capital Partners, under the leadership of respected veteran investor John Pattar, had a real estate platform firing on all cylinders.
Much of the Hong Kong-based firm’s success was thanks to the strong performance of its flagship Fudo Capital fund series. Carrying a value-add risk and return profile and an investing strategy spanning most of Asia’s major property markets, the series was considered one of the region’s best institutional offerings, and Pattar among the best institutional managers.
The first two funds in the series generated IRRs of more than 30 percent, far exceeding their targets. A who’s who of global private real estate backing-institutions had overcrowded each offering, even as they grew in size. Fudo I, which was closed in 2005, had a $350 million target but corralled $430 million; Fudo II had a $750 million target but closed on $815 million in 2009 – as Lehman Brothers was collapsing.
Fudo III, which would ultimately determine its manager’s fate, was the best haul yet, amassing a cool $1 billion in 2015 against an $850 million target.
Among the institutions to commit capital was US pension manager Teacher Retirement System of Texas, Korean pension giant National Pension Service, Hong Kong’s de facto central bank, the Hong Kong Monetary Authority and investment and advisory firm, The Townsend Group. Other US investors were on board, including Arizona Public Safety Personnel Retirement System; the YMCA Retirement Fund; the University of Michigan; and the Episcopal church’s pension manager, The Church Pension Group.
CLSA had established itself among the sector’s top 30 private real estate fundraisers in Asia and was finding itself able to look beyond value-add investing, too. Last year, the firm struck a joint venture with Tokyo-based property firm Mitsubishi Estate for a core property venture. Seeded with an initial $300 million via an account from its partner, and with the promise of more Japanese equity to come, they aspired to build a portfolio of yield-producing assets valued at more than $1 billion within four years.
Then, just three months ago, the firm announced a European expansion was in the cards as well: CLSA formed a strategic partnership with London-based manager Avignon Capital to pursue investments for its growing cohort of Asian investors. That initiative came with an €800 million figure, according to Pattar’s LinkedIn account.
Before a single euro was spent, however, everything changed. Along came US private equity giant KKR, with longstanding ambitions of its own to be generating the performances of the Fudo funds in Asia. The firm had decided Pattar was the individual to lead their effort and last month, the New York-based firm sent shockwaves through Asia’s private real estate market when it announced it had got its man: Pattar was joining on August 1. With that, CLSA’s linchpin had been removed.
As PERE went to press, the situation was in a state of flux: while Pattar was on garden leave, KKR was planning life with him, CLSA without him and Fudo III’s investors what to do with a fund frozen during its investment period. The defection of a key person from such a successful platform midway through the deployment of its biggest fund to date had become the talk of the Asian market, as such a rare event. One head of a rival manager said: “It is bad for our industry. It puts a distrust in GPs from an LP perspective.” Another added: “This highlights the risk with boutique managers.”
Dogged day for CLSA
“We are committed to our investors and our real estate investment management business long term. We see continued strong growth opportunities and our intention is to grow the business with the team that has been in place for over a decade and which has helped to build the franchise we have today,” CLSA chief Jonathan Slone said in a statement to PERE.
PATTAR: THE KEY MAN
The Englishman’s importance to CLSA was its draw but also its undoing, even if it was expensive for KKR to dislodge him.
Pattar takes the helm of KKR’s Asia real estate business after a career that has so far seen the Englishman’s gravitas steadily increase.
He has led CLSA’s real estate platform since 2004, comprising a team of more than 20 executives, three value-add funds and, most recently, a core venture. His time in Asia real estate extends further. Prior to joining CLSA, he was chief investment officer of Lend Lease Real Estate Investments (Asia). But it was at CLSA where he forged his reputation and this was reflected in the paperwork behind the Fudo Capital funds for which he was a stipulated key person
As the series progressed, CLSA and Fudo’s investors agreed to extend the series’ key-person provision to four other executives: Yeu Liong Ching, chief financial officer; Paul Gately, regional head of asset management; Hirotaka Uchiyama, head of Japan; and Byron Zhao, head of China and Taiwan. However, while the additional names were agreed, Patter’s importance was not diluted. In the documentation for Fudo Capital III the key-persons provision stipulated that if either two of the incoming four executives departed, or if Pattar left, an event would be triggered. When Pattar departed, CLSA pre-empted the trigger by cancelling the remaining year of its investment period.
“In the next fund, CLSA probably would have seen a slightly different composition as the investors get more comfortable with the broader team,” one fund formation lawyer whose firm has worked for both KKR and CLSA, told PERE. He added: “It is unusual to see an individual key person leave because they normally have money tied up in the business and you’d expect them to get a heavy allocation of any carry. If you’re leaving halfway through, you’re potentially leaving money on the table, which is almost certainly forgone if going to a competitor. So, if there was performance there, I would have thought he must have been incentivized heavily to make that move.”
Despite its real estate business being headless, CLSA’s message in the immediate aftermath of Patter’s departure was one of dogged determination to stay in the game. To aid its cause, the firm tied down CLSA Capital Real Estate’s 20-plus-strong headcount, at least until the end of Fudo III. In anticipation of a key person being triggered by Pattar’s departure, CLSA terminated the vehicle’s investment period with a year left to go and has confirmed its staff will see the vehicle through.
A direct consequence of terminating the investment period was that $350 million was left uninvested. Typically, managers hold 10 percent of a vehicle’s equity in reserve, meaning about $250 million would ultimately realistically be undeployed. In any event, PERE understands 70 percent of the committed capital has already been returned to investors following a number of successful exits, and that just three assets remain unrealized. These are: Robinson 77, an office in Singapore; an office in Puxi, China; and a brace of retail investments in Jingumae and Shinjuku, Tokyo.
“John thinks those will happen by the end of the year anyway,” said another manager familiar with the situation. By 2019, CLSA may therefore have a personnel retention issue on its hands with the same manager expecting certain individuals to be approached by KKR to join Pattar when his non-compete expires in August.
Not content with personnel, KKR is also offering to steward the fund through to completion. In his own statement to PERE, Ralph Rosenberg, the firm’s real estate head, said: “KKR and John are focused on supporting the objectives of the CLSA investors in any way that they would like us to in the stewardship of the few remaining assets in their fund. These relationships are our priority. We have communicated this message to everyone involved.”
The KKR-CLSA investor crossover is believed to extend to approximately 80 percent of Fudo III’s corpus. The Teacher Retirement System of Texas, which committed $200 million to the fund, is thought to be KKR’s biggest real estate investor, for example.
“CLSA has been left in the lurch. It’s pretty traumatic,” said another rival manager. “But KKR is a predatory business. They acquire and leverage buyouts.”
Nevertheless, onlookers agreed that the question of whether the appointment by KKR of Pattar is worth the ripples it has caused in the sector will be determined by a successful capital raising for a pan-Asia fund of its own. The firm created its real estate business in 2011 with the appointment of Rosenberg and it has since grown to $13 billion of assets under management, about $2 billion of which is in Asia. But where KKR has successfully raised commingled, discretionary funds for its strategies in North America and Europe – it closed on $2 billion for its second Americas fund in January – an Asia effort has yet to materialize. Boss installed, that should change. PERE has learned that a Pattar-led fundraising is slated to happen either at the end of the year or early next year.
KKR will bet its relationships with Fudo investors supersede any aggravations caused by the disruption provoked by its decapitating of CLSA’s real estate business. The investor response has been mixed. “How are you feeling about it?” PERE asked one. “Not very good,” came the reply. “I was quite displeased to say the least. I’m not going to forget about this.”
But while that investor said he would not entertain a KKR approach for equity, others were nuanced in their response. Another investor said: “People gave [CLSA] money because of John. Even bringing in a new person with the same credentials, they wouldn’t have worked with the team or the assets.”
Regardless, he said he would take a meeting with Pattar’s new employer about its fund, when the time comes. “We have a longstanding relationship with KKR,” he acknowledged.
However, he also suggested he would seek assurances to protect against another key departure. “We’d be asking for all kinds of measures. Maybe if they brought co-investment. A blind-pool though? That might be difficult. You have to presume this might happen again. We’d put it in the pros and cons.”
A third investor said he would not back a KKR fund if offered, but for Fudo III, he added: “The outstanding investments to be divested are all within reach so it doesn’t really matter whether it is KKR or Fudo to take care of the legacy.”
“They’ll be able to reallocate that capital, I’m sure,” commented one of the rival managers. “The investors will be fine. I think if only one-third had been called, that’s a bigger issue. But two-thirds? They’ll be ok.”
Nonetheless, at a time when deployment and capital calls are fast becoming the primary concern for investors and managers alike in today’s heated markets, the cancelation of capital and the removal of one of Asia’s best-performing managers reduces an already limited set of manager options via which institutions can capture value from the region’s property markets. KKR has invested on a deal-by-deal basis in markets including Australia, China and India, and in both equity and debt transactions. But, even with Pattar onboard, the firm is still technically a first-time fund manager in Asian real estate. Investors proceeding with KKR will need to look beyond that factor, and the drama surrounding Pattar’s recruitment, when determining whether to back its debut fund.
Meanwhile, despite Slone’s determinations to the contrary, the CITIC Securities-owned business will need to identify viable new leadership to continue as before. Whether premature or not, its rivals are already ringing the death knell. “CLSA is trying to figure out if there’s anything they can do to preserve their franchise. They don’t have anyone to run it,” said one of the managers. Another added: “I think they’re done. I don’t think they have a business anymore.”
Of greater concern is that certain investors agree. PERE asked one if there will be a Fudo IV. “No,” came the reply. “It must finish.”