Hong Kong-headquartered logistics platform ESR is in discussions to welcome more investors into its biggest logistics vehicle in China.
ESR is expected to either dilute the stakes of existing investors in ESR China Development Platform or expand its size, according to two sources close to the situation.
“It is possible that there will be new investors coming in, post-closing,” said Josh Daitch, group head of fund management and capital at ESR. He declined to comment further on future fundraising activities.
The platform, ESR’s fifth and largest development-focused vehicle in China, already has a current potential investment capacity of up to $4 billion after ESR secured backing from Dutch pension manager APG Asset Management and Singapore’s sovereign wealth fund GIC, earlier this week. They are both ESR shareholders and long-term investors. APG and GIC hold 6.9 percent and 5.96 percent stakes at ESR respectively.
PERE understands that both APG and GIC committed $400 million each into the latest vehicle with the other $200 million from ESR. They will also re-up when the vehicle has deployed $2 billion including leverage.
Although this is the first time the three organizations have teamed up to develop logistics assets in China, both APG and GIC have partnered with ESR separately for similar strategies in the past. In 2013, APG formed the logistics development fund E-Shang Star with Chinese logistics group E-Shang. E-Shang later merged with Redwood Group to become ESR in 2016. GIC also entered a $500 million joint venture with ESR in 2020 to develop logistics assets in China.
ECDP will have a similar investment strategy and return target to the firm’s other development vehicles in the country, according to Daitch. The firm will continue to seek institutional-grade logistics facilities in major hubs in China with a particular focus on tier one and so-called ‘1.5 cities’, but lower tier cities could be considered if the firm is able to find suitable development partners.
In terms of performance, Daitch said the country’s logistics sector still offers very “attractive, risk-adjusted” returns despite recent tightening of yields. “We have been building logistics in China for over 10 years and yes, yield on cost have come down several hundred basis points from where they used to be, but cap rates and debt costs have compressed comparatively. So even if your development margin has tightened a little bit, it is still pretty healthy,” Daitch explained.
ECDP is the first major logistics vehicle that the firm has launched since the acquisition of Singapore-headquartered multi-asset manager ARA Asset Management in August. Following that transaction, ESR and ARA-owned LOGOS will have a combined $10.2 billion of asset under management in China’s logistics sector.
Daitch told PERE there would “certainly be changes, but not immediately” when it came to the merging of the ESR and LOGOS businesses in China. “The Logos integration has to be handled carefully over time. Our capital partners and customers all see the synergies and opportunities of the combined platform. But we each have to manage our overlapping investment mandates in many markets today and going forward,” he said.