When The Blackstone Group’s president Hamilton ‘Tony’ James said on an earnings call last month that his firm had “by far the biggest footprint in real estate in Asia” and was “about the only way to play the whole region,” he may have ruffled a few local feathers.
Blackstone had just received the biggest real estate fund commitment ever made by the State of New Jersey Division of Investment. The US pension plan’s director Timothy Walsh also commented on the firm's regional dominance: “There’s not a whole lot of competition out there,” he told the Wall Street Journal, describing the private equity real estate space in Asia as “just a few niche guys.”
Perhaps harshly put, but both men had a point. The global financial crisis largely laid waste to the efforts of the region’s previous investors of scale – the US investment banks and insurance companies like Goldman Sachs, Bank of America Merrill Lynch, Citigroup and AIG.
Today, when it comes to investing across Asia, Blackstone’s capital buckets are by far the deepest. There are plenty of other firms with reputable pan-Asia track records, but few are trying to raise $1 billion or more. James is predicting a first close of $1 billion for its Blackstone Real Estate Partners Asia fund this quarter, which will be just a quarter of the expected total. Indeed, the juggernaut du jour has grabbed pole position in Asia, as it has in other regions (our most recent PERE50 ranking published two weeks ago, confirmed just how far ahead the firm has pulled). The US banks, meanwhile, are absent.
While those groups – perhaps Morgan Stanley Real Estate Investing aside – are showing no signs of making a comeback, one important development this week added to the trend of private equity firms gearing up to fill the void. PERE revealed that Blackstone’s rival KKR has hired Bryan Southergill as its first Asia real estate head, effectively giving the firm’s nascent real estate platform dedicated leadership in each of the three main regions. The firm brought aboard a European head last year and hired its global head in New York in 2011.
KKR’s challenge will take time. Its expansion thus far has been measured to say the least, and only in March this year did news break of a debut fund. In a report on the fund by Bloomberg, the news service reported how the firm had invested approximately $650 million so far in property globally – a drop in the ocean compared with its $78 billion in assets under management.
It follows that KKR’s real estate story in Asia is short too. Headlines thus far include a $140 million joint venture in China with developer Sino-Ocean Land in 2011, and another joint venture with the Government of Singapore Investment Corporation, aimed at lending debt to developers in India and valued at about $150 million, in March. Southergill's mandate is to add to this tally.
Other private equity frims are making inroads too. Apollo Global Management, for example, has been building in the region ever since consuming Citigroup's Citi Property Investors business in 2010. And then there are regional private equity managers, such as Baring Private Equity Asia which should have fundraising news soon. Hony Capital in China is yet a further example, although its remit is not pan-Asia presently.
While the corporate pieces on the board are changing, it is unsurprising that a number of the individuals tasked with growing the private equity presence in the region actually used to work for the very groups that have left a hole in the market. KKR's Southergill is ex-JPMorgan and Morgan Stanley. Mark Fogle, who is leading Baring’s Asia team, has worked for Deutsche Bank’s RREEF and AIG. The badges may change, but the faces stay the same.
Nevertheless, these people will take it a step at the time to build platforms capable of taking on the large deals that were so natural to their former employers. Blackstone moved slowly as well. The firm invested little between 2006, when it opened its first Asia office in Mumbai, and 2010. It has since ploughed $1.5 billion-plus of equity into the region.
When the competition has scaled up, James and Walsh will likely have to temper their comments. For now, however, they are not wrong.