News analysis: HSBC spin-out

HSBC is the latest global bank at which senior management in a captive private equity real estate business are separating out. It also is arguably the least well-known of them all.

HSBC, 'the world’s local bank' as its corporate messaging goes, is also the world’s fifth largest by assets under management ($2.42 trillion). Given its size, one might have assumed it would be one of best-known when it comes to its private equity real estate group. Yet, whether by choice or otherwise, it is arguably the bank with the lowest-profile business of all. 

Ask a senior professional at another bank about HSBC’s private equity real estate operations and he will invariably fail to name the person in charge or any of its funds. But this could change next year – starting in March to be precise – when a buyout by senior management is completed.

Four days before Christmas, HSBC said it had agreed to sell 80.1 percent of what is called HSBC Specialist Investments Limited (HSIL) to senior management, with HSBC retaining a 19.9 percent interest.

As the bank explained in the statement, HSBC Specialist Investments invests equity capital on behalf of the bank and third-party investors in real estate and its alternative asset cousin, infrastructure. 

In keeping with the largess of the bank, HSIL is of significant size. Its gross assets total nearly £35.1 billion ($52.6 billion).

The man in charge of real estate at HSBC Specialist Investments is Stuart Jackson. Jackson, an Englishman based in Hong Kong, is a former UK real estate investment banker at JP Morgan. Prior to JP Morgan, he was at German bank Eurohypo, which he joined in 2003 as vice president and where he helped set up its corporate finance and fund management business.

Including the infrastructure unit, the group employs 75 people and is headquartered in the HSBC tower in London’s Docklands, but it also has regional offices in Hong Kong, New York and Paris. It has raised a total of 11 funds and $4 billion of equity.

The evolution of the private equity real estate business is as follows: its first fund was in 1998, when it raised £40 million for the HSBC Shopping Centre Fund. This was followed in 1999 by the Charterhouse London Residential Property Fund, which corralled £100 million. In the same year, it raised a follow-up vehicle, the Shopping Centre Fund II, managing £50 million of equity.

Next, in 2003, it raised the UK Active Property Fund, which garnered £105 million. This value-added offering amassed 22 commercial real estate investments throughout the UK, which are now mostly realised. Then, in 2004, it raised £75 million for its third shopping centre fund in the HSBC series.

In 2007, however, HSIL changed its strategy and began looking overseas. It launched the HSBC NF China Real Estate Fund, for which it managed to collect $710 million in capital commitments.

A year later – 2008 – came the HSBC European Active Real Estate Fund, which raised €400 million. This fund still has 75 percent of its equity to invest, but it has nevertheless been making selective exits. In September this year, for example, it sold a retail park in Nottingham that it acquired in July 2009 from a REIT.

The latest development in HSBC’s evolution in private equity real estate came earlier this year when it organised a segregated mandate to invest in Asia and Europe with equity of $200 million.

According to a business overview document, the China fund is an opportunity fund that began making its first realisations in 2009, having entered into six developments projects and two pre-IPO investments in mainland China. One scheme is called No 1 Financial Street in Beijing, which is a twin 20-storey office tower that HSBC bought in 2007 as a distressed partially-completed development site from local firm Beijing Capital at a discount of around 20 percent to an independently appraised market valuation. The project is around 45 percent leased now and was sold in September this year.

Throughout the last decade, HSBC has similarly evolved its infrastructure business, raising the HSBC Infrastructure Fund in 2001 with £125 million of equity. The follow-up Fund II was closed in 2005 on £300 million. In 2006, the first fund was taken public and joined the London FTSE 250 stock exchange in 2007.

This year saw another development as HSIL began to raise Infrastructure Fund III, which is looking to raise $1 billion. If achieved, that would make it the biggest fund to date at the group.

As the finishing touches are put to the spin-out, it is likely the senior management will clock up some significant air miles as they update limited partners. After all, limited partners in its real estate and linfrastructure funds are geographically spread out. Thirty five percent of investors are in the Middle East, 28 percent are in the UK, 25 percent are in Asia, and the remaining 12 percent in Continental Europe.

HSBC, it is worth pointing out, invests 22 percent of the total equity in its funds. Apart from the bank, the LP grouping is largely made up of family offices and high net worth individuals. These account for 46 percent of investors. Institutions make up 28 percent and sovereign wealth funds, four percent.

HSIL’s infrastructure funds contain some US assets. But with no North American assets in its property vehicles, HSBC’s private equity real estate business is very much a UK, European and Asian model. Whether North America gets added after the spin-out remains to be seen. As the separation of the senior management team from the bank nears conclusion, it is safe to say the industry will hear more from HSIL in the near future.