Friday Letter Asia advance

Apollo Global Management is expanding its real estate operations into Asia, at a time when more traditional competitors are hanging on by their fingertips. The emergence of capital-rich domestic buyers, though, will keep Apollo on its toes. 

Japanese real estate may not be everyone’s cup of tea at the moment, but the country – together with other mature Asian markets such as Australia and South Korea – does offer an irresistible opportunity for at least one firm: Apollo Global Management. While some rivals are downgrading Japan’s prospects due to its long-term demographics, Apollo is eyeing the land of the rising sun both for its distress and to take advantage of the lack of competition in the region since the credit crisis.

After revealing this week it had hired Grant Kelley, the former Asia boss of Colony Capital, to lead the firm’s push in the region, PERE has learned that Asia and North America would be at the forefront of Apollo’s assault in 2010.

Apollo's campaign will be targeting the “significant distress caused by overleveraged borrowers”, one source said. However, they added, it would be helped in no small part by the fact competition in the region has been “decimated. The big players have gone, the banks and financial companies have gone and the J-REITs are holding on by their fingertips.”

With Japanese housing starts now at their lowest levels since 1964 and residential land price indices down 40 percent from their 1991 peak, the country’s real estate market and investors have taken a beating.

Hiring Kelley – who set up his own firm, Holdfast Capital, in 2009 after almost a decade with Colony – will offer Apollo experienced feet on the ground, at a time when there are few institutional players around.

Declining institutional presence though isn’t easily translating to a wholesale lack of competition, as fund managers attending this week’s PERE Forum: Asia, in Hong Kong, noted. Indeed, the emergence of new home-grown competition for assets is emerging in the shape of capital-rich domestic buyers.

For international GPs, the fund managers argued, being successful in Asia is about bringing more to the table than just equity. Apollo believes it has the answer to that problem in hiring Kelley and his cohort.

Richard Price, chief executive officer for ING REIM, however explained at our Forum that it’s not always as simple as it seems. “I can think of a deal which was taken away from us [by domestic buyers] in the time it took for us to put together an investment committee,” he said.

If Price’s anecdote is anything to go by, this cadre of capital will keep Kelley and Co. – and other Asia-focused GPs – on their toes, even though the new Apollo team is entering the fray with decades of on-the-ground experience of their own.