Three years after his death, Ronald Reagan is making something of a comeback. Last month, The Reagan Diaries, a compendium of the former US president's private journals, reached number four on Amazon's best seller list. An excerpt from the book even appeared in the July & August issue of Vanity Fair, which featured Reagan-era action star Bruce Willis on the cover. And a few weeks before the book's release, the 41st president not only served as the de facto host of a Republican presidential debate—it was held at the Ronald Reagan Presidential Library in Simi Valley, California—but also as its guiding spirit. In an effort to channel Reagan's legendary optimism, the candidates specifically mentioned his name 19 times.
Last month, however, the upbeat spirit of President Reagan was perhaps best reflected not in California, but in Washington DC, where another building named after the former commander-in-chief—the Ronald Reagan Building and International Trade Center—played host to another equally raucous affair: IFC's 9th annual global private equity conference focused on emerging markets. And if you thought presidential longshots like Tom Tancredo were optimistic, then you didn't meet some of the investors trying to raise capital at the event. West African real estate, anyone?
Fund managers looking to raise an emerging market vehicle may want to avoid wowing potential LPs with optimistic stories about vast, untapped markets and unlimited potential. Most people get all that. Instead, focus on hard-nosed realism and straightforward communication—then, convince your investors to get on a plane with you.
Yet for all the positive assessments delivered about the state of the developing world, there are obviously huge challenges in prudently deploying capital in these markets, challenges that were brought into focus during a Friday morning panel on real estate investing.
Take Russia, for example. The former Communist state may have embraced capitalism—due, in some small part, to Reagan himself—but that doesn't mean the new capitalists play by Western rules. Jon Hodnett, a Moscow-based director with JER Partners, told the crowd that ten of his deals had fallen apart because a background check on a seller or a local partner turned up some unsavory details.
Another panelist, Phil Fitzgerald of Paladin Realty Investors, which focuses primarily in Latin America, related a similar story about working in Brazil. One of Paladin's operating partners recently sued the firm after they had been removed from a project. And the reason they filed suit was that they hadn't been given enough notice for the meeting in which they were actually fired. “Never mind that they still showed up to the meeting,” Fitzgerald said.
As these anecdotes (and many others) make clear, the biggest challenge in emerging markets is finding the right local partner. Yet as the panelists made clear, it is also critical to have the right limited partners as well. Hodnett noted that JER had to reach out to a whole new group of investors in order to raise their Russian-focused property vehicle. Many existing LPs simply did not feel comfortable investing in the former Soviet Union.
The reason why, according to the panelists, is that a disconnect still remains between perception and reality in many emerging markets. Russia, for example, is viewed as a hotbed of corruption, but Hodnett noted that Germany, which is generally perceived to be clean, is equally if not more corrupt. When it comes to South America, Fitzgerald said that popular perceptions of violence and danger are overblown—he actually feels safer walking around Cartagena than Mexico City.
The key to overcoming those perceptions—and, by extension, increasing the liquidity and transparency in these markets— is first-hand experience. Any potential investor who actually traveled to Moscow, Hodnett said, eventually invested in JER's fund.
From that perspective, then, fund managers looking to raise an emerging market vehicle may want to avoid wowing potential LPs with optimistic stories about vast, untapped markets and unlimited potential. Most people get all that. Instead, focus on hard-nosed realism and straightforward communication— then, convince your investors to get on a plane with you.
In other words, borrow a page from Ronald Reagan. Yes, he was an optimist, but even more than that, The Great Communicator knew how to get his message across.
Blackstone IPO could raise $4.8bn
The Blackstone Group will sell 133.3 million common units of its management company in a public offering expected to raise between $3.9 billion (€2.9 billion) and $4.1 billion. The IPO's size could swell to $4.8 billion, should its underwriters decide to float an additional 20 million units. The size of the IPO—coupled with recent news that the Chinese government will buy a $3 billion stake in the firm's management company—means Blackstone is set to raise nearly $8 billion in fresh capital. Blackstone's offering represents about a 10 percent stake in its management company, implying that the firm could be valued as high as $40 billion.
Citigroup launches infrastructure investment arm
Citigroup's alternative asset management arm has launched an infrastructure investment platform called Citi Infrastructure Investors. The new team will be co-headed by Juan Bejar in London and Felicity Gates in New York. Bejar was previously chief operating officer at Spanish infrastructure group Ferrovial, while Gates was head of Deutsche Bank's North American infrastructure business. CAI, Citigroup's alternative asset management platform, has approximately $54 billion (€42 billion) of assets under management.
Marathon Real Estate plans $200m IPO
Marathon Real Estate Finance, a real estate investment trust managed by the property arm of New York-based hedge fund Marathon Asset Management, has filed for a $200 million (€148 million) initial public offering. The REIT will focus on commercial real estate debt investments in the US. The vehicle will hit the ground running with $1.3 billion worth of acquired assets, including $886 million of assets financed in a collateralized debt obligation. Not including its CMBS investments, around half of the portfolio is in New York and California and around half is invested in the office and lodging sectors.
Carlyle forms $100m US hotel venture
The Carlyle Group is committing $100 million (€73 million) to a joint venture with publicly listed lodging REIT MHI Hospitality to acquire and develop hotel assets. MHI will identify investment opportunities, while Carlyle's latest US property fund, Carlyle Realty Partners V, will fund up to 90 percent of the equity for individual transactions. So far in 2007, Carlyle has been bullish on the US hotel sector, acquiring the Sheraton College Park in suburban Washington DC and the Houston Sofitel Hotel.
Harrison Street raises $210m for debut fund
Chicago-based private equity real estate firm Harrison Street has closed its debut fund, Harrison Street Real Estate Partners I, on $210 million (€160 million). The firm, which was founded by former Heitman pro Chris Merrill and members of the Galvin family in 2005, is focused on niche sectors such as student housing, medial office buildings, self storage and senior housing. The firm has already formed a number of joint ventures with local operating partners and has acquired approximately $300 million of assets to date.
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