One thing most investors are keen to avoid is marrying up with a fund manager prone to style drift.
That is one thing it would be difficult to accuse New York-based Asia alternative investment manager Aetos Capital of. As the firm’s real estate division seeks to raise $1 billion for its fourth opportunity real estate fund, Aetos Capital Asia IV Strategic Partners, the message from its leader is that the firm will maintain its investment strategy in the countries where it has built its track record, namely Japan and China.
PERE has learned that Aetos has already managed a $250 million initial closing for the fund, which will run for seven years and target typical opportunity fund returns of more than 20 percent IRR. It is expected to hold a final close shortly after the summer. It is also understood the fund would predominantly target Japanese real estate investments, although approximately 20 percent to 25 percent would be allocated to Chinese investments.
Former Morgan Stanley global head of real estate investment banking, Scott Kelley, who founded the real estate platform in 2001, would not discuss Aetos’ fundraising activities but he told PERE that, on a general basis, the firm would not deviate from its core markets as investors “want people to stick to what they are really good at. When people have had their focus diluted, that, historically, has been a very grim thing”.
Aetos is eyeing IRRs in the high-30s for its debut fund, the $740 million Aetos Capital Asia I, which after closing in 2003, capitalised on a period of growth in Japan following the country’s “lost decade” of real estate and stock market deflation. The firm now has more than 80 staff working from an office in Tokyo.
Kelley highlighted mergers between J-REITs as one path likely to lead to ample investment opportunities in the future. Indeed, last month, Bloomberg reported that Japan Retail Fund Investment Corporation, the recently-merged joint venture between Mitsubishi Corp, UBS and LaSalle Japan REIT, was considering ¥32.3 billion (€281 million; $346 million) in asset disposals over the next two to three years.
Kelley also said there could be opportunities stemming from overseas investors which entered the Japanese market late in the decade and now find themselves overleveraged and in need of exiting. “That creates opportunities for people with capital and asset management capabilities,” he said.
In terms of China, Aetos is focused on investing in newly-developed residential assets that will be bought by end-users rather than property speculators. Kelley blamed the latter for an increase in state regulation in China. “The reason why so many of China’s markets have become so overheated is because of the punters,” he said.
While there were signs that state regulation was working to cool the market following a period of extreme growth (JP Morgan Chase research suggests transaction volumes increased 35 percent in 2009 year-on-year, while Bloomberg reported in April that prices had risen by 11.7 percent across 70 Chinese cities since April 2009), Kelley said: “We are still trying to play this massive demographic trend of urbanisation.” According to the Chinese Academy of Social Sciences, the Chinese urbanisation rate is on course to reach 48 percent this year following years of exponential growth – just the sort of long term picture Aetos is no doubt mindful of when sticking to its investment philosophy.