Fresh from raising $800 million for its first Asia real estate vehicle, Fortress Investment Group has laid down quite a marker in the land of the rising sun.
Spending $230 million of that equity on the entity debt of Japan’s biggest private equity real estate firm, Tokyo-based daVinci Holdings, Fortress has effectively bought a significant option on the Japanese market, particularly Tokyo offices.
In July, Fortress acquired daVinci’s debt from French lender BNP Paribas while simultaneously granting a two-year debt extension to the Japanese fund manager.
The deal included warrants enabling Fortress to switch the debt to an equity position of 32 percent. A further 27 percent could be seized from daVinci’s founder Osamu ‘Sam’ Kaneko should the firm default again. Kaneko, alongside other senior staff, have since departed the firm in a bid to regain lender and wider market support. Over the last couple of years daVinci has struggled to service the high prices it paid for assets, such as Pacific Century Place.
But with much of daVinci’s assets under water, some Fortress rivals have warned the deal may cause trouble further down the line. By making the investment via Fortress’ Japan Opportunity Fund, rather than from the group’s balance sheet, Fortress has given itself a finite time in which to turn daVinci around.
One senior executive said the investment in the debt of daVinci, which has raised more than $4 billion of equity over the past five years, was an unusual transaction: “Usually you’d get the franchise for free, as with Lehman’s private equity real estate unit, then you put in sweat equity to generate value”. But he countered: “It gives them a critical mass of assets if they can hold those underlying funds together and stabilise them”.
Another rival also questioned the transaction saying: “Maybe a handful of daVinci’s assets will stand up and the equity coming from them can be used to pay the Fortress capital back but, to us, the deal isn’t 100 percent obvious.”
DaVinci’s assets though could give Fortress a vital footing in the Japanese market, one real estate professional argued, provided they can be recapitalised. “If Fortress can keep the portfolio intact, they will have an option on these assets if the market recovers and could get a fee stream from asset management.”
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