InfraRed Capital Partners, the real estate and infrastructure investment management business spun out from HSBC in 2011, and Nan Fung, the real estate and textiles business, have secured commitments of around $200 million for their InfraRed NF China Real Estate Fund II and hope to hold follow-on closings later in the year, PERE has learned.
The fund is understood to be targeting a size of $500 million. InfraRed held a first close in the fourth quarter of last year and a second in the first quarter of this year, and it is planning to hold a third close by the end of the summer.
The fund’s LPs predominantly consist of institutional investors from northern Europe, the Middle East and north Asia. However, InfraRed is also working with placement agent Greenhill & Co to market its fund more broadly.
The fund’s strategy largely follows that of its 2007 predecessor, as predominantly value-add with a focus on offices and retail. All the capital from the $708 million InfraRed NF China Real Estate Fund has been committed to 16 projects, four of which have been exited and eight others of which have exit plans. The firm is expected to realize all of Fund I’s assets by 2015.
This fund also is understood to be considering deploying mezzanine finance as part of its strategy, focused primarily on the residential space, to take advantage of inefficiencies in China’s lending markets. Certain domestic banks have been wary of lending to real estate developers since the global financial crisis started, cutting off a primary source of capital for these groups. InfraRed is expected to target a 15 percent interest rate plus a profit share for these mezzanine loans.
Overall, the firm is targeting a 20 percent IRR from the investments of the fund, with two-thirds of its capital devoted to development projects and one third to mezzanine projects.
InfraRed has begun to build up a deal pipeline and expects to begin investing soon. Although no co-investment money has been raised for Fund II specifically, the fund has an agreement with the Nan Fung Group, which also was its joint venture partner for Fund I. As part of this agreement, Nan Fung will provide the fund with a co-investment right over its deal flow in mainland China.
Two of the deals in InfraRed’s pipeline are expected to require about $100 million of co-investment capital. The investments of the new fund are expected to require $50 million to $125 million of equity each with varying levels of participation between co-investment and the fund. The fund as a whole is expected to be leveraged by between 30 percent and 40 percent.
InfraRed declined to comment when approached.