COMMENT: A maverick manoeuvre

The latest fund of SC Capital has no hard cap - and deliberately so. Is this a test of GP discipline or LP loyalty?

Few would dispute that the private equity real estate firm of Thai entrepreneur Suchad Chiaranussati is flying right now.

The Singapore-headquartered outfit this week held a first closing of $365 million for its fourth pan-Asia Real Estate Capital Asia Partners (RECAP) opportunity fund – almost half its $750 million target capital haul. Indeed, sources say the firm is able to fill the entire vehicle with existing LPs and, including new investors keen for an allocation, it has more than $1.4 billion of soft-circled demand.

A scan of its returns for funds one, two and three explains why. SC Capital’s first RECAP fund generated a 16 percent IRR and a 2x equity multiple. Its second fund is almost liquidated and is projecting an IRR of more than 30 percent and a 1.9x equity multiple. By year-end, investors in RECAP III are expected to see back approximately $180 million of the $530 million they invested in 2012, and the fund is said also to be tracking an IRR in excess of 30 percent.

To say investors have been rewarded for their backing to date is an understatement. “It has been such a good run,” one RECAP LP confirmed to PERE.

As such, it is perhaps understandable that the company founded by ex-Westbrook Partners executive Suchad (whether a function of his lengthy surname or his increasing profile, he is best known by his first name) enjoys a fair bit of flexibility when it comes to investments. At a time when managers’ discretion to pick and choose what strategies look good in the moment largely has been curtailed by now-weary institutions burned during the crisis, his firm has guided investors into frontier territories.

Perhaps the launch of a core fund last year was not a maverick move in itself, but it was novel to make it closed-ended when open-ended funds are the norm for such lower-risk/return property investments. The investing of $70 million into hotels in untested Myanmar, on the other hand, was a step other investment managers would not dream of. One of the hotels actually is a cruise liner moored and converted, confirming SC Capital’s reputation as a mould-breaker.

The LP admitted that Suchad has an exuberance and charm when marketing his strategy and that “perhaps we could get carried away with his enthusiasm.” However, he countered that, when the performance is so strong, why not trust him?

And that is precisely why the lack of an official hard cap is so interesting. An unofficial cap has been set at $800 million so, theoretically, more than $600 million will walk away disappointed come the firm’s second and final closing, which is expected by mid-November. The firm, predictably, would not talk about fundraising, but sources familiar say it is trying to demonstrate discipline in the face of temptation. This has upset certain investors who would rather a cap be legally documented.

It is an unusual position for a GP to take for sure, particularly as so many others continue to bow and scrape to get even a fraction of the capital support SC Capital is enjoying. But is it a gamble? PERE thinks it could be, but a calculated one. In declining a request to make official its capital-raising cap in the face of copious demand, the firm is testing its investors’ loyalty. It risks losing one or two that simply are mandated to ensure such paperwork is in place.

However, this could be a significant boon for the firm if it closes at its unofficial hard cap of $800 million, for it will have done precisely what it said it would do – and without legal obligation. In addition, it will likely have extended for itself even more trust among its investors to enjoy when exploring further uncharted waters.

The LP said of SC Capital’s core fund: “I’d prefer it if they didn’t do that,” fearing its resources would be thinly spread. Nonetheless, the LP re-upped anyway. “That's what happens when you ride on the coattails of an entrepreneur,” he conceded.