Friday Letter Running the numbers

At last week’s PERE Forum: Asia in Hong Kong, the conference’s delegates added their voices to those heard on stage. Thanks to technology, we can tell you what the approximately 250 delegates said. 

There were countless pertinent points made by the participants onstage at last week’s PERE Forum: Asia in Hong Kong. But thanks to frequent openings for audience participation, the approximately 250 delegates of the two-day event were able to make their voices heard as well. For those of you who missed the conference, here is what they said.

Perhaps it is not surprising given the location of the conference, but the majority of delegates regarded China as the Asian market they felt most bullish about. Of those voting, 40 percent placed China atop their preferred investment locations. Hoke Slaugher, managing director of Morgan Stanley Asia, joked on stage: “Where in the world will China be in 60 years? More like where in China will the world be in 60 years.”

It was interesting, however, that only 4 percent of the delegates were bullish on Korea. Late last year, PERE reported that Morgan Stanley Real Estate Investing was bringing its 10-year tenure in the country to a close, regarding the market as neither a developed market offering “distressed plays” nor an emerging market offering “growth plays”. Seems Korea is not a private equity real estate market.

Back to China, 48 percent agreed that all the talk of real estate bubbles should be restricted to luxury housing in Tier I cities, while 43 percent said there was no bubble in the country’s Tier II and Tier III cities. This chimes acutely with the latest research from Partners Group, covered by this week. In its Private Markets Navigator for the first half of 2011, the Zug-based alternatives investor said it had sided with those concerned about the potential for a correction in the east of the country.

However, before international GPs and LPs get too excited by the prospect of tapping the underserved majority of China’s 1.3 trillion populous, 55 percent of delegates expected RMB-denominated investment funds to have a significant advantage over foreign capital vehicles and ultimately would force the latter out of the market. On-stage, participants highlighted how domestic capital was cheaper and less beholden to fiduciary constraints.

But where one door closes, another opens. Perhaps investors will now consider spreading their efforts to include more of Southeast Asia in their portfolios. Here, opinion on and off the stage differed however, with Malaysia attracting 55 percent of delegate nods as the most attractive country in the region (outside of Singapore), compared to a paltry 4 percent for Indonesia. Former chief investment officer for the Abu Dhabi Investment Authority, Mark Burton, said of Malaysia: “It’s just Kuala Lumpur” and “If I had to have a punt, I would pick Indonesia.”

When delegates were asked for their thoughts on subjects particular to private equity real estate, their answers were somewhat telling. Strangely, given the large numbers of GPs in the room, 51 percent said an asset’s exit, in regards to the type of buyer and the timing, rarely matched what was proposed in the asset’s investment memorandum. To compound matters, 15 percent said it never does and 0 percent suggested it always does.

Perhaps that explains why 37 percent of delegates said that, if internal resources were no constraint, the optimal way for institutional investors to invest in Asia was direct, 36 percent via club structures and 27 percent through traditional commingled funds. Canada Pension Plan Investment Board director Guy Fulton said more direct investment channels were favoured at present, but he stressed the need for adequate resources to back up such ambitions: “For joint ventures and clubs…there’s a further level of asset management you wouldn’t have as fund investors.”

For those loyal to the traditional fund model, ambitions for mega-funds were reigned in, with 54 percent of delegates feeling the optimal size of opportunity funds in Asia should be between $500 million and $1 billion. Furthermore, return expectations were more sober with 41 percent of delegates saying that a 15 percent to 18 percent return was a reasonable minimum from opportunistic investments and just 16 percent held on to loftier 20 percent returns as a prerequisite target.

After running the numbers, it seems that a decent bet for an Asia-focused GP is to launch a $1 billion opportunity fund targeting 18 percent returns from investments in Tier II or Tier III cities in China, perhaps reserving a small allocation for Malaysia. So long as the GP promotes a strategy with tight investment parameters, there’s every chance of alluring LPs, particularly those lacking the resources to match their ambitions for more direct investing with action.

Then again, a mock question used by the conference chairman to test the delegate response devices at the start of the conference revealed that 20 percent of the audience thought that PERE was an electronic nose hair trimmer, while 33 percent thought ANREV, the Asian Association for Investors in Non-listed Real Estate Vehicles, was an Albanian varsity team.

What do delegates know!