What we know (and don’t know) about HNA’s $1.5bn PE fund

One of China’s most-talked about conglomerates, HNA Group, is understood to be launching a private equity fund to invest in overseas real estate, travel and aviation assets. According to a Bloomberg report this week, an HNA unit is targeting a fundraising of $1.5 billion for the Overseas Aviation and Tourism Industry Fund and hopes for a final closing by year-end.

HNA’s decision to become a manager of third-party money at a time when the debt-laden company is under heavy regulatory scrutiny, has piqued the real estate industry’s attention. But the news also raises questions:

1. What is the motive?

HNA is following the example set by other Chinese institutions, particularly real estate developers like China Vanke, which have established asset management businesses to move away from investing balance sheet capital. But for a group that has made some high-profile direct overseas acquisitions, what is the motivation behind launching a commingled fund?

It could be an alternative way to fund future global acquisitions rather than relying solely on its own balance sheet. Another rationale is the group could transfer some of its directly held assets into the fund structure. That way, it continues to control the assets and earn management fees instead of selling to other private managers, as some industry observers had anticipated. It is also a means of generating revenue at a time when the debt-laden conglomerate is facing a liquidity squeeze. According to its annual report released last month, HNA’s total debt touched around 598 billion yuan ($94 billion; €79 billion) last year. However, this might be different from the latest undisclosed debt obligation, since the firm has also reportedly sold around $13 billion in assets in 2018.

2. Who is backing the fund?

HNA Aviation and Tourism Group, the GP for the fund, is targeting third-party capital. But who will be the likely investors? Domestic retail and institutional investors in China, for instance, could be more willing to back a first-time manager targeting offshore investments, given strategic and cultural factors, and would also be more familiar with its business operations than a large global institutional investor, especially when the manager in question has been under such global scrutiny. But, many large Chinese institutions have historically preferred to invest directly in overseas markets as opposed to fund investments.

As one lawyer told PERE, there could also be potential conflict of interest issues if the fund is investing into assets already held by HNA.

3. What is HNA’s skin-in-the game?

How much is the sponsor’s co-commitment in the fund? According to industry observers, investors typically want first-time managers to have more skin in the game and invest a larger percentage of the total capital than the standard 5 percent found in funds launched within mature series.

4. What is the investment strategy?

According to Reuters, HNA is guaranteeing investors a minimum return of 8-10 percent from the fund investments, raising questions about the kind of new investments targeted by the firm. In the real estate context, these returns typically fall in the core bucket, which means the group is looking to focus more on stabilized assets rather than development projects or other opportunistic deals.

5. Remember capital controls? They still exist.

The biggest question, however, is whether HNA will be able to get requisite approvals from Chinese regulators to close deals. As PERE reported earlier, Chinese authorities have steadily expanded their surveillance of offshore deals, especially in restrictive sectors like real estate, and now demand even the offshore subsidiaries of mainland Chinese companies get approvals before closing overseas deals. Additionally, if HNA is looking to raise mainland Chinese institutional money, these investors would also need to get their currency conversion quota reviewed by the regulators.

To contact the author, email akhullar@peimedia.com