Sores are certainly being felt in the aftermath of the Hong Kong-based executive’s defection to become the private equity powerhouse’s head of real estate in Asia.
In particular, it is hard to see how his former employer CLSA Capital Partners, the investment management business, can progress CLSA Capital Real Estate beyond the life of its latest flagship Fudo Capital property fund.
On the surface at least, it had been all going so well. Fudo Capital III, like the pan-Asia, value-add series’ two predecessor funds, outraised its target, hauling $1 billion against an $850 million goal, on a more-than-solid performance or 30 percent-plus IRRs for those previous efforts. A core-strategy venture with Mitsubishi Estate in Japan, with initial equity of $300 million, had also materialized.
But on learning Pattar was leaving, CLSA pre-empted the triggering of the Fudo III’s key person provision by cancelling the remaining year of its investment period with $350 million left to deploy. It was to the surprise of many onlookers in the market, the dismay of some connected to the situation.
It is hard to see Fudo III being revitalized with CLSA already confirming the vehicle is now effectively an asset management exercise. About 70 percent of the capital has been returned already – no bad thing – and the remaining three assets of the fund are expected to be exited by year-end.
Much will depend on personnel retention. CLSA has kept the real estate platform’s 20-plus staff signed up to the end of the fund, and the firm has stated it wants to carry on afterwards. KKR, meanwhile, has already made overtures about assisting Fudo III’s investors see through the vehicle. A safe bet would see some CLSA Capital Real Estate executives handing out KKR business cards after Pattar’s non-compete expires on August 1. Others will be eyeing both their current employer for indications of a real estate strategy beyond Pattar and their Rolodex of industry executive search firms.
Understandably, some of the fund’s investors are unimpressed. “How are you feeling about it,” PERE asked one. “Not very good,” came the reply. “I was quite displeased to say the least,” he added, before stating: “I’m not going to forget about this.”
Another told us: “People gave them money because of John. Even bringing in a new person with the same credentials, they wouldn’t have worked with the team or the assets.”
The second investor also is a KRR investor, but expressed concerns. “We have a longstanding relationship with KKR. [But we’re] going to be asking: if I give you money again, are you going to jump again?”
Drama aside, ultimately, the question of whether KKR’s pursuit of Pattar is worth it will be answered by the firm’s ability to raise capital for its debut Asia fund. The region’s real estate strategy was under the stewardship of ex-JPMorgan executive Bryan Southergill, who joined in 2013, but even though it struck its first deal, a venture in China, two years prior, it has been a case of deal-by-deal since. No fund materialized.
It is believed approximately 80 percent of Fudo III’s investors by capital committed are already KKR investors. Texas Teachers, which committed $200 million, is the biggest of these. The firm will have bet the strength of these relationships will outweigh any irritations caused by their actions leading to the sudden halting of another firm’s fund.
PERE’s sources suggest KKR’s first Asian fund will launch either by year-end or early next year. That is the true litmus test. KKR has already raised $1 billion-plus funds for real estate strategies in North America and Europe. If the firm does it again in Asia then it will see the call to raid CLSA of its real estate boss as vindicated.
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