Emerging from the ashes

Equity International is known for its investments in emerging markets. However, distress caused by the credit market dislocation is now prompting the Chicago-based firm to seriously consider investments in mature markets, such as Japan, for the first time. By Zoe Hughes

In April, Equity International co-founder Sam Zell said he saw little opportunity for investment in the US and Western Europe real estate markets. The emerging markets investor argued that the compelling story was the growing middle class in regions such as Latin America and Asia.

That, of course, was before the dramatic events of the past two months.

Since then the Chicago-based private equity real estate firm has watched along with the rest of the industry as mature – and primarily core – markets have become an increasingly distressed play. The seizing-up of the credit markets has left many real estate investors in Asia, and notably Japan, struggling to raise much-needed capital – with many turning to private equity real estate as a result.

Speaking to PERE, Gary Garrabrant, chief executive officer and co-founder of Equity International, said it was because of such distress that Equity International was now seriously looking – for the first time – at mature markets in the region, particularly in Japan and Australia.

The move would be made alongside Equity International's traditional focus in emerging markets. But Garrabrant added that the credit crunch had made mature markets in the region much more attractive. “For the first time things are beginning to look a lot more interesting in these countries,” he said.

“There's now distress. For us we have been looking for these sorts of opportunities for a while and have been frustrated as they have been extremely difficult to find. Now, however, the opportunities are emerging, meaning we can look seriously at these countries for the first time,” Garrabrant added.

The credit market dislocation has prompted a wave of distress in countries such as Japan, particularly among developers and real estate investment trusts. Last month, New City Residences filed for bankruptcy protection – the first J-REIT to go bust this year.

In August, Japanese real estate developer Urban Corp., a widely recognized name in the country, filed for bankruptcy with debts of ¥255.8 billion (around $2.3 billion; €1.5 billion), at the time the largest bankruptcy among listed companies in Japan in 2008. Last month, the developer delayed publishing its rehabilitation plan after failing to find a financial sponsor. Others to have gone bankrupt recently include Tokyo-based condominium builder Zephyr and construction company Tada.

Equity International is, of course, known for its investments in emerging markets, particularly in Mexico and other parts of Latin America. In August, the firm revealed it had made annual returns of 24.4 percent and a multiple of 3.1x on invested capital from its first fund, Equity International Fund I, which was boosted by investments in Mexico. In April, the firm sold its remaining in Mexico's largest homebuilder, Homex, six years after first investing in the company. Equity International had helped the developer list on the New York and Mexican Stock Exchanges achieving an IPO value of $15.80 per American Depositary Share, as traded on the NYSE. Homex's share price on the NYSE at the time of the exit was $62.17.

Garrabrant insisted Equity International would continue to focus much of its efforts on emerging markets, with the firm currently researching opportunities for investments in Vietnam and sub-Saharan Africa.

However he said distress in mature markets being hit by the credit crisis – including the UK and Spain – would be part of Equity International's strategy. These countries, he said, were producing some “exciting and historic opportunities.”