BoA Merrill Lynch agrees $650m settlement with Asia fund LPs

Investors in Bank of America Merrill Lynch’s Asian Real Estate Opportunities Fund are poised to receive a large settlement from the Wall Street bank as it seeks to avoid potential litigation. The settlement follows certain actions by the fund’s management considered “non-fiduciary” by the investors.

PERE understands from sources familiar with the matter that BoAML has agreed with the limited partners advisory committee of the fund, which includes the Abu Dhabi Investment Council (ADIC), French insurance group AXA and General Electric Pension Trust, a settlement valued at approximately $650 million.

In addition, Blackstone, which in July was brought in by the bank to perform a sub-advisory function for the assets of the $2.65 billion fund as well as other Asian real estate held on BoA ML’s balance sheet, is to assume the full general partner responsibilities of the vehicle. The succession of a general partner follows an eventful year for the platform, which included an aborted attempt by the bank to offload it.

The New York-based private equity and real estate giant was one of a handful of bidders, also including ING Real Estate Investment Management and LaSalle Investment Management, but later withdrew from the bidding process.

Blackstone was believed to have been reluctant to take on the general partner function then as it would have meant assuming the platform’s liabilities. However, following the agreement of a settlement with the bank, whose global real estate platform is led by head of real estate principal investments Doug Sesler, the firm will take on the role.

Assuming a positive response from the remainder of the approximately 25-strong pool of investors in the fund, expected mid-October, the move by BoA Merrill Lynch will effectively end its third-party real estate investing business. Last month, its smaller European private equity real estate arm was spun out via a management buyout by platform head Roger Barris. BoA Merrill Lynch is however expected to remain a limited partner in the fund, having invested $800 million of its equity.

The takeover of BoA Merrill Lynch’s general partner function would see Blackstone take on about 30 staff from the bank, whose real estate investing business was orchestrated from Hong Kong.

One source with knowledge of the matter said the limited partners of the fund, which held its final closing at the end of 2008, sought compensation following various “non-fiduciary” actions. These are understood to have included an ill-timed foreign exchange trade and a poorly executed series of valuations of assets transferred from BoA ML’s balance sheet into the fund vehicle.

Unusual for a private equity real estate fund, the majority of the assets of the vehicle were previously held by Merrill Lynch’s balance sheet before being transferred. Against the backdrop of the global economic crisis, the transfer valuations of some of the assets, which included real estate in Korea, Japan, China and India across a number of sectors, has since been challenged by the limited partners.

The fund, alongside many other bank-sponsored private equity real estate funds of its vintage, is understood to have under-performed and is currently projecting losses. One source predicted: “I would say they might end up recovering 60 cents to 70 cents on the dollar.”

But the source said: “The limited partner advisory committee wanted to make very clear that they weren’t seeking a settlement for bad investing. They were seeking a settlement for poor fiduciary fund management. BoA just want to move on,” he added, “They want to walk away saying we tried to do the right thing.”

Another source familiar with the matter indicated the settlement would not be material to BoA Merrill Lynch.

The platform is now expected to fall under the control of Blackstone’s Asia team led by managing directors Alan Miyasaki in Japan, Christopher Heady in China and Tuhan Parikh in India. The majority of the BoA Merrill Lynch investment team, including platform head Martin Seol, who assumed the leadership of the fund following the departure of Tim Grady early last year, are not expected to join Blackstone.

With no new investments to be made by the platform, Blackstone will look to employ the majority of BoA Merrill Lynch’s asset management team however.

Neither Blackstone nor the fund’s investors would comment. A spokesperson from BoA Merrill Lynch would not comment on a settlement but said: “We believe we are close to agreement with a highly qualified third party to transition the role of general partner of our Asia Opportunities Fund. We believe, after consultation with certain lead investors, that this course of action is in the best interest of the limited partners, including BofAML, and provides the stability and management expertise to maximize fund returns.”