Globalizing capital

In the new world of private equity real estate investing, capital will be coming from everywhere and going everywhere, from increasingly sophisticated institutional investors spread around the globe. GPs should keep this in mind as they decide how to target Asia. By Dave Keating

Last month's PERE Forum in London may have been focused on Europe, but private equity's increasing concentration on Asia was never far from anyone's minds. Indeed it seemed that in many ways, geographic boundaries are becoming increasingly irrelevant in an era of global capital.

Andrew Baum, chairman of research house Property Funds Research, underscored this point in his keynote speech to delegates. Real estate investment, he argued, is becoming an essentially cross-border activity. Relaying the story of a recent conference he was at in Malaysia, he said he was amazed by the geographic spread of the investors – with both the direct and the indirect financers coming from every continent. Baum said it struck him at that precise moment just how much the landscape has changed, recounting how he met investors from Syria, the Philippines, Ukraine and even Paraguay. All of them wanted to know what was going on in Malaysia.

The evidence that real estate is becoming increasingly borderless isn't just anecdotal. Statistics show that the global flow of capital has gone beyond moving just between Western countries, or even just moving from West to East. Today's real estate financing is coming from all over the world and going all over the world.

A look at the biggest institutional investors in the world targeting real estate reflects this point. Out of the ten largest such funds in value, as compiled by Property Funds Research, five are from outside Europe and North America. And those funds, such as the Abu Dhabi Investment Authority, the Japanese Government Pension Fund and the Government of Singapore Investment Corporation, aren't looking to just invest domestically. Nor are they just looking in Western markets. PFR's research shows that of the 3,100 institutional investors in its universe, about 60 percent are targeting value-added opportunities, and that largely translates to emerging markets, considering vehicles outside Europe and North America are taking the most risk.

Cross-border investing has been increasing generally by leaps and bounds, more than quadrupling from 2003 to 2006 according to PFR's research. This growth drastically outpaces the slight growth in domestic investing over the same period. The fundraising news in June did much to demonstrate this point, when Australian firm MGPA closed the largest dedicated Asian private equity real estate fund ever on $3.9 billion (€2.5 billion). That fund was raised in conjunction with the firm's latest Europe fund, MGPA Europe Fund III, which closed on the same day on $1.3 billion (€842 million). The two funds will be collectively known as MGPA Fund III, but they will be administered completely seperately. Notably, both funds attracted commitments from investors spread across North America, Australia, Europe and the Middle East.

So what does this increase in cross-border activity mean on a practical level? For one thing, as institutional investors become more familiar and comfortable with cross-border investing, they may start getting more strategic about the geographic diversification in their real estate activity. A time may be fast approaching when big global funds will be out of favor, and investors will be showing a preference for specialized regional funds.

This likelihood was voiced by another speaker at the PERE Forum in London, Partners Group real estate chief strategist Nori Gerardo Lietz. In her keynote address, Lietz said that investors are already becoming increasingly sophisticated about global diversified investing and are beginning to demand a choice about where to deploy their capital. Predicting an increase in regional funds over the next few years, Lietz said that the number of global vehicles would not increase and could possibly decline as they fall out of favor with increasingly sophisticated institutional investors. And those regional funds will likely be more weighted toward Asia and emerging markets. According to a survey by Partners Group, some 51 percent of first time funds are currently focused on Asia-Pacific and emerging markets, compared with 34.6 percent targeting the US and 25.7 percent Western Europe.

For private equity real estate firms looking to increase their allocation to Asia, this may mean that instead of including a larger remit for Asia in a future global fund, they may want to consider creating a dedicated Asia vehicle instead. With both fund raising and fund deploying becoming increasingly global, it appears likely that the savvy institutional investors of today will want a more specific Asia strategy than just a slice of a global fund.

Citco opens in Japan
Citco Real Estate Investment Fund Services is opening an office in the Shiroyama Trust Tower in Tokyo, Japan. Mark Beckett, formerly assistant managing director of Citco's private equity and real estate division in Luxembourg, will head up the new office, according to the firm. It is the first time Citco has opened an office in the country as it looks to service clients that own real estate there. A spokesman for Citco said the Tokyo office reflected the company's commitment to the region. Citco's real estate business is part of the Citco Group, an independent financial services group employing over 4,000 staff around the world.

Mumbai developer to raise $450m
Phoenix Mills, a Mumbai-based real estate developer, is planning to raise around $450 million (€292 million) from private equity investors for financing its mall and hospitality projects. The company is reportedly planning to raise $200 million to fund its retail project pipeline, and $250 million to fund its hospitality projects. Chief Financial Officer Mahesh Iyer told Reuters that the firm has begun fundraising. He also said that all of the projects in the company's pipeline are FDI-compliant, meaning that foreign groups can invest in them. For this reason the firm has chosen to raise a pool of private equity capital to invest in various projects, rather than partnering with firms for specific projects. It is only seeking capital from foreign investors. The fundraising push comes after the firm raised $300 million last year to fund retail projects. The company is also raising another $250 million in private equity funding for its hotels business.

South African firm launches $1bn fund
A new property fund targeting sub-Saharan Africa is being shopped to UK investors by Capitalworks Investment Partners, a South African fund manager. The fund, launched earlier this month, is looking to raise $500 million (€318 million) in equity, and to add an additional $500 million in debt, according to the Financial Times. The fund is reportedly targeting a 25 percent IRR. Capitalworks is mainly looking for investors in the UK and the Middle East, but it may also take on investors from elsewhere. The firm intends to hold its first close by late summer. The fund will start with a portfolio of eight retail and office properties in South Africa and Zambia. The fund will also be looking for assets in the Sub-Saharan African countries which are most stable, especially Mozambique, Nigeria, Ghana, Mauritius and Zambia.

Morgan Stanley hires new India CEO
Morgan Stanley Investment Management, the asset management arm of Morgan Stanley, has appointed Anthony Heredia chief executive officer of its India operations. Heredia, a qualified chartered accountant, was previously the head of sales and distribution at HSBC Asset Management (India) before joining Morgan Stanley Investment Management in February last year as head of sales and marketing for India. The India chief executive officer position was previously held by Narayan Ramachandran, who took that position in October 2007.