COMMENT: Right and wrong distress

The removal of Thailand from the strategy of one Asian private equity real estate firm has given rise to debate about how much political upheaval opportunistic investors can handle.

When opportunistic real estate investors talk about capitalizing on distressed opportunities, they typically are referring to distress relating to the financial circumstances of a property or its owner. Sometimes, they are referring to distress at the tenancy level, particularly if an opportunity to hike rents with a new occupier is on the table.

Rarely are they talking about distress at the political level. That type of distress is widely regarded as too difficult a sell, a bridge too far, for managers of institutional capital. Accordingly, few investment managers lately have peddled the merits of capital outlays in markets like Ukraine or, for that matter, in Thailand where the government was sacked in May and replaced with a military council, the constitution suspended, and where the so-called red and yellow shirts clash oftentimes in bloody conflict.

Arch Capital, the Hong Kong-based private equity real estate firm is one of two opportunistic fund managers well-known and regarded for its investment track record in Thailand. But Arch has suspended its investing activities in the country. The firm, which PERE revealed yesterday had raised almost half the target equity for its third pan-Asia fund, had the scope to invest up to 15 percent of the vehicle’s equity in Thailand, however it is understood to have hit pause while it waits for political reform to effectuate.

Almost certainly to Arch’s chagrin given it has generated IRRs of more than 40 percent from legacy Thai investments made via its Funds I and II, the firm cannot expect to call on Thailand to supplement its China-centric investment focus this time around – as things stand. With media outlets suggesting the conflicts on the streets of Bangkok are likely to escalate rather than dissipate, this fund’s investment period may well come and go before political tensions subside.

Perhaps it is of little surprise then that SC Capital Partners is taking an interest in Thailand. The Singapore-based firm behind $70 million of outlays in Myanmar – a country arguably even more familiar with military intervention than Thailand – is giving bullish signals about the positive outcome of the current political affray. One of the most daring of Asian private equity real estate firms when it comes to viewing political uncertainty as offering up as much investment potential as economic instability, SC has told PERE that it is seeing stronger governance and reforms arising from the current conflict, which ultimately will make Thailand a more rather than less attractive proposition.

SC Capital has a 15-year track record in the country and has managed to return a 67 percent IRR from among the 15 or so transactions it has undertaken there. The firm’s worse performing deal in the country still generated 18 percent, and SC’s investors have backed its judgement to the tune of $530 million of equity in its last fund. Soon the firm will hit the fundraising trail again. It will be interesting to learn to what extent Thailand figures in its marketing pitch.

More interesting is that these two well-known and respected firms have sounded such different tunes about Thailand and, in so doing, they have struck differing chords about whether political distress actually should be considered distinct from economic distress. Ultimately, the capital that backs them will decide whether distress is distress or whether, in fact, it is not.