ASIAVIEW: Should I stay or should I go?


Upon entering 2010, there were a number of situations in Asia that required resolution. Now, as the year concludes, most have found answers.

Last month, Citi Property Investors (CPI), with a $1.29 billion Asia opportunity fund, was signed over to Apollo Global Management. Also this month, the Asia real estate investment management business of Bank of America Merrill Lynch (BoA ML), with a larger fund of $2.65 billion, came under the control of The Blackstone Group.

There was a common determining factor in those two cases, namely the will of the LPs. In the case of CPI, its LPs were required to vote on Apollo’s takeover bid. While the LPs of BoA ML’s fund had no official vote over its direction, they were nonetheless consulted and ultimately, via a handsome settlement well-publicised by PERE, were able to determine their future with a show of hands.

Next up is the Asia real estate fund management business of American International Group (AIG), one of the poster boys of the global financial crisis. Last month, PERE revealed that global investment manager Invesco had emerged as the sole bidder for the platform. 

Plugging the Asia gap with an established entity looks like a good move for Invesco

The move by the Atlanta-based investment management giant makes perfect sense. At the end of June, its real estate unit, Invesco Real Estate, had a total of $15.6 billion in directly held assets under management, including commingled fund investments. Of that, just $100 million is in Asia, relative to $11 billion in the US and $4 billion in Europe.  AIG, on the other hand, has approximately $5 billion in gross assets in the region.

Plugging the Asia gap with an established entity looks like a good move for Invesco, particularly as AIG’s most recent opportunity effort, the Pan-Asia AIG Asian Real Estate Partners II fund, still has an enviable equity pile. According to conversations with the LPs of the fund, approximately 80 percent of the $740 million raised in September 2008 remains uninvested. Perhaps that is unsurprisingly, given that the fund closed in the same month that Lehman Brothers collapsed.

However, therein lies the dilemma for its LPs. A successful takeover (and who knows how long that could take, given that Apollo-CPI took eight months) would see the approximately 20-strong investor pool, including North American institutions and sovereign wealth funds, inherit a proposition they didn’t originally sign up for.

On the one hand, Invesco is a seemingly stable entity with aspirations to grow meaningfully into Asia and, perhaps importantly, has no legacy issues to contend with. In managing director Cheng-Soon Lau, the firm is led by a 20-year veteran accredited for having led more than $1.7 billion in real estate transactions across Asia.

The LPs couldn’t force them to stop; it’s a fully discretionary fund. But [AIG’s] staff were thinking about their careers. They didn’t want to destroy their credibility
Unamed source

For most of the LPs, however, the investing landscape has changed since they penned their initial commitments. Some have since reverted away from blind pool, commingled funds entirely, now favouring separate accounts. In many respects, having Invesco assume control of their commitments is like signing another cheque to something new. After all, the firm’s investment strategy and corporate culture are likely to have serious differences to that of AIG.

Of course, this dilemma begs the question whether the investors would be permitted to terminate their commitments. One of the LPs told PERE that the fund has no exit trigger in place should the sponsor change.

Such release triggers are indeed rare, although they do exist. For example, the New City Asia Opportunity Fund had a sponsor-change release trigger should embattled New City Asia Fund Management have blocked its LPs’ move to replace it with ING Real Estate Investment Management last year.

But release trigger or no, what firm in its right mind wants to get heavy with its limited partners? You’d be hard pressed to find one willing to sue a sovereign wealth fund, for instance.

According to another of AIG’s LPs, one of the main reasons AIG stopped investing, post-Lehman collapse, was because its LPs asked it to. “The LPs couldn’t force them to stop; it’s a fully discretionary fund,” he said. “But [AIG’s] staff were thinking about their careers. They didn’t want to destroy their credibility.” Likewise, Invesco’s team, likely to comprise much of the same staff, will probably tread lightly should certain investors seek exits.

Other LPs in the fund are, notionally at least, pleased with the arrival of Invesco. One LP described Invesco as a ‘stable platform’ boasting a ‘more certain future’. Another LP added: “As long as a good manager like Invesco takes over the fund, we’ll be fine.”

While contractually powerless to prevent their committed capital from being drawn, the LPs of AIG’s fund will vote on whether Invesco succeeds the insurer, and the majority required is said to be ‘pretty high’. That said, if Invesco’s takeover is approved – and early chatter suggests it just might be – the question of whether investors stay or go answers itself.