Sensing what it regarded as an opportunity too good to miss, Pacific Alliance Group last month agreed on a ¥4.5 billion (€35 million; $46 million) investment in convertible bonds issued by Secured Capital Japan (SCJ).
If the bonds are converted, as Pacific Alliance co-founder Chris Gradel intends, the deal effectively lands Pacific Alliance with a significant minority stake in a firm which, at its height, had a market capitalisation of almost $1 billion. The market cap of Secured Capital, a Japanese real estate fund manager with approximately $5.7 billion of assets under management, is now trading at less than $100 million.
Gradel told PERE that the structure of the investment, which involved Pacific Alliance paying ¥3 billion for existing bonds up front and providing an option for SCJ to draw down the rest of the capital at a later stage, strengthened the balance sheet of SCJ while giving Pacific Alliance an immediate strategic position in the company.
We came in to both help boost their balance sheet and provide more dry powder at the management level. This deal killed two birds with one stone.
Following the agreement, Gradel said, SCJ would be “one of the very few remaining well capitalised real estate firms in Japan, in a period where many distressed assets will be under forced sale”.
Pacific Alliance, the Hong-Kong based investment manager, was attracted to Secured Capital Japan because of its “great track record, its funds which made top quartile returns, its similar entrepreneurial culture and personal relationships over the years”, said Gradel.
“We came in to both help boost their balance sheet and provide more dry powder at the management level,” he said. “This deal killed two birds with one stone. They weren't under any real financial pressure, but the ability to strengthen their balance sheet was welcomed.”
Gradel said the investment would give Pacific Alliance a window into the Japanese investment world. The deal gives both parties coinvestment rights in each others deals. Pacific Alliance, founded in 2002 by Gradel and Horst Geicke and which also invests in private equity, will use the investment to get a footing in the country's real estate distressed debt market.
“We are looking at senior secured debt and SCJ knows that market as well as anyone,” Gradel added. In addition to debt investments, SCJ also manages core-plus, mezzanine and opportunity vehicles. It has more than 100 staff at its Tokyo office working on these vehicles.
“There is clearly weakness in the Japanese economy,” continued Gradel. The deal though would give Pacific Alliance the chance to enter the Tokyo market, at a time when Japanese developers are struggling to raise capital from banks despite possessing performing assets. “We like the opportunity to buy the distressed debt of those assets,” he added.