Feature: Banyan Tree looks to 2010 for brighter times

Steve Small is currently taking a vacation after steering his firm’s first private equity real estate development fund through its final close. The chief executive officer of the Banyan Tree Indochina Hospitality Fund is in a cautious mood now that the seven year vehicle (it has a maximum life of nine years) is closed.

The fund closed on $283 million of equity, just shy of its minimum target of $300 million after securing a $15 million commitment from “Middle East” sources, as Small puts it. The money will now kick start the development of the fund’s flagship scheme, a resort scheme in the Laguna Hue, Vietnam.

Speaking to PERE from his vacation, Small offers some sobering thoughts about the coming 18 months but expects brighter times at the end of 2010.

“Fundraising continues to be extremely challenging but investors are willing to commit where they can understand the project,” he says. Despite falling short of the original fundraising target, Banyan Tree has garnered commitments from investors including HSBC Bank and the Nan Fung Group. The money raised is sufficient for Banyan Tree to proceed with the Laguna Hue scheme. This project is expected to absorb 75 percent of the fund’s equity but the final closing means development of the first phase is not going to need debt funding. Other regions the fund could invest in include Laos and Cambodia.

Small says his investors are going to have to accept that the return profile of their investment may suffer as a result of current weak demand for hospitality space.  The fund had originally targeted a 30 percent return for the vehicle but Small says: “Investors still want the returns but are keen for the risk to be managed down and accept that this can impair the potential return.”

And he adds: “Demand (for hospitality space) is significantly down from when the fund had its first closing in February 2008. We are hoping to see an end to the current global economic downturn by the end of 2010 and thereafter expect to see a pickup in demand for resort space in Asia generally.”

Small also points to the firm’s incoming Banyan Tree China Hospitality Fund. Originally penned for launch in the first half of this year, Small now says it is expected to launch before the end of the year as the firm reshuffles its “pipeline of projects” and “refines the structure” of the vehicle as it awaits for investor sentiment to improve.

Fine tuning exactly when fund managers launch their vehicles is more important now than ever. Should investors buy into Small’s timing predictions and subsequently into Banyan Tree’s China effort, it would be fair to imagine that the fund executive’s next holiday will be taken with a little less caution in the air.