The future for Merrill Lynch's real estate opportunity funds platform has become far from certain.
While the ink dries on Bank of America's takeover of the investment bank, question marks have arisen over whether the platform, which manages the $2.65 billion Asian Real Estate Opportunity Fund, will be carried forward by Bank of America as a going concern. These questions were exacerbated by the resignation last month of the fund's leader, managing director and head of global commercial real estate, Timothy Grady.
Grady was unreachable for comment. But PERE has learned from sources close to the matter that he resigned over disagreements with senior management following uncertainties concerning the strategic direction of the pan-Asian fund.
Grady is understood to have become disillusioned with the number of senior changes at the newly-merged bank. At the time of press, Grady was on gardening leave and was not thought to have agreed another role.
His departure brings the curtain down on a three-year tenure at Merrill Lynch. Grady was appointed from Morgan Stanley Real Estate Investing in 2006, where he was in charge of investments across Asia for the bank's real estate opportunity fund series, MSREF.
Charged with growing Merrill's real estate platform in Asia last October, Grady led the bank's successful close of its debut Asia fund on $2.65 billion of equity – $650 million more than originally targeted.
His responsibilities have since passed to Martin Seol, chief investment officer of the Asia fund, on a permanent basis. Reporting to head of principal real estate investing in Asia, Doug Sesler, Seol has been charged with managing a team of more than 60 staff across seven offices in Asia. More significantly, Seol takes on a fund management platform currently in directional stasis.
Adverse market conditions have sidelined plans for a second fund in the series. The Asian Real Estate Opportunities Fund II was planned to hit the fundraising trail this year but, according to sources within Merrill Lynch, until Bank of America evaluates the potential benefits of keeping the fund management platform, no new vehicles will be proposed.
It is understood that Bank of America may not make a decision on the platform for as long as 18 months. This uncertainty has led to reports that rival fund managers are interested in acquiring Merrill Lynch's management mandate and its approximately $662.5 million equity position in the current fund.
The Blackstone Group and Leon Black's Apollo Management have been mooted as interested buyers. Merrill Lynch, however, is keen to distance itself from these reports and has written to LPs in its quarterly investor letter to categorically state that no sales process is in place.
Merrill's Asia fund was developed around a seed portfolio of assets which accounted for approximately 75 percent of the equity committed. The remaining 25 percent has since been invested and although it is in the early days of its cycle, one source close to the fund told PERE its performance was “in line with other funds”.
The source added: “Given the early vintage, a large part would be unrealised. [But] investors return expectations are conforming to what they are seeing in the market place.” Returns could be similar to those recorded by opportunity funds during the 1998/1999 vintages, the source said.
The fund's strategy was to align sectors with geographies across Asia. It has bought offices in Seoul, Korea and Tokyo as well as residential assets in China and logistics properties in India. As with most investment bank sponsored funds, there was no key-man clause concerning Tim Grady, however the source said: “Any senior level departure like this would be bound to receive investor attention.”