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The real estate fund management community in Asia was rocked hard twice last month after two of its biggest players, Merrill Lynch and Citi Property Investors, shelved plans for their second pan-Asia funds and parted ways with their top men.
At the start of April, Merrill Lynch's Timothy Grady resigned after becoming disillusioned by senior management changes and, according to those close to the matter, after receiving little direction for his 60-strong team. This was all set against the backdrop of Merrill Lynch's takeover by Bank of America and a growing uncertainty about the possible takeover of Merrill Lynch's real estate platform by private equity firms, such as The Blackstone Group and Apollo Management. Plans for a second Asia opportunity fund have also been quashed.
“When you fly around the world to meet your investors, you'd better turn up not just to shake their hand.”
One week later, PERE learned of another senior departure, this time at Citi Property Investors. Grady's counterpart, David Schaefer, was asked to leave as the real estate investment management business of Citibank switched its focus on the continent from fundraising to fund management. In doing so, it also cancelled its plans for a second vehicle, despite having already closed on $400 million of commitments. That equity is currently being returned to investors.
While both real estate operations have parted company with their leaders and cancelled their follow-up vehicles, for the LPs which committed the lion's share of the equity to their existing Asian opportunity funds, the comparison stops there.
Putting aside the limited returns managed so far by either the $2.65 billion Merrill Lynch Asia Real Estate Opportunity Fund, which closed late last year, or the $1.29 billion CPI Capital Partners Asia Pacific fund, which closed in early 2007, LPs in Merrill Lynch's fund will have far more to worry about than those investing with CPI.
At the heart of their concern is the matter of communication. According to sources close to Merrill Lynch, Bank of America may not even come to a decision about whether to carry on the platform for up to 18 months. It's anyone's guess what Martin Seol, the fund's former chief investment officer and Grady's replacement, will say to LPs.
As one source said: “When you fly around the world to meet your investors, you'd better turn up not just to shake their hand.” LPs in Merrill Lynch's fund will hope Seol comes to see them with a distinct action plan for their equity commitments rather than just a different hand to shake.
On that basis, LPs which invested with Citi should be able to sleep a little easier. The hand shaker, Schaefer, has moved on, but the firm has rapidly repositioned itself as a platform focused on asset managing the capital it has already raised.
Roger Orf, CPI's president and chief executive officer, has been quick to switch the Asia platform's leader, who was more skilled at fundraising and therefore very effective during a bull run, with one more geared for a period of asset management. As such CPI's limited partners should be looking forward to a long relationship with Schaefer's replacement, former head of India Ravi Hansoty.
The departures of Grady and Schaefer though do throw up another bone of contention – that of key man clauses. The private equity real estate model as adopted by the investment banking world has generally avoided the rule whereby penalties are imposed if key individuals leave a general partnership. Yes, it might lead to the star culture most investment banks have wanted to avoid, but at least LPs would know the person leading the distribution of their capital has a long-term carried interest in its success.
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