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BLUEPRINT: Goodwin hunting

Goodwin Gaw

Most successful entrepreneurs will tell you that one or maybe two key decisions that they made are responsible for getting them to where they are today. Ask Goodwin Gaw, founder of Hong Kong-based private equity real estate firm Gaw Capital Partners, and he’ll tell you his happened not in Asia, but stateside.

It was the mid-1990s when a 27-year-old Gaw, ambitious for a life in real estate investing prompted by a spell in architecture, identified The Roosevelt Hotel at 7000 Hollywood Boulevard in Los Angeles as his first meaningful opportunistic play. Once famous for hosting the first Academy Awards in 1929 and for providing Marilyn Monroe a home for two years, the iconic hotel required $4 million of equity to buy – a small but significant sum for someone with no track record.

“I thought my father would give me the money,” Gaw admits, “but he gave me $1 million of the $4 million I needed. I had a little over a month to raise the rest. It was make or break for me.” Threatened with working for his father, the late Anthony Gaw – “which I didn’t want to do,” he says – Gaw indeed found other investors to put up the rest. He acquired the building for less than $10 million and, over the ensuing years, embarked on a substantial refurbishment programme.

Recalling feelings of anxiety, Gaw can now happily declare that the gamble paid off. The hotel’s cash flow has increased threefold, enabling him to pay back his father and the other investors and refinance the property. “The cash flow in recent years has grown to more than 20 times the EBITDA at acquisition,” he declares proudly. “I could then leverage off that and build a US portfolio.”

Gaw, now 42, is more relaxed these days. Sitting in a sparse boardroom atop 1 Lyndhurst Tower, a 22-storey office acquired in March 2007 by Gaw Capital’s maiden fund, he retells his anecdotes confident in the knowledge that today he sits at the helm of a business with more than $5 billion of assets under management – one of China’s larger private equity real estate businesses. Nonetheless, he is only too aware that bad calls at this stage in his career have potentially far greater consequences. “Failure late in your career could be too big to come back from,” he says.

Thankfully, 2010 has been a success for Gaw Capital relative to its peers. After closing on a total of $420 million for Gateway Real Estate Fund III late last year, one of the few final closings of 2010, the firm has firepower for 2011 and beyond at a time when many rivals are still trying to attract capital.


You hear all the talk about measures aimed at reducing borrowings and tougher restrictions on second and third homes, but policy impact really depends on the city. I’d argue that local policy plays a far more significant role. At the end of the day, government budgets mainly come from land sales.

Goodwin Gaw, Gaw Capital Partners

Gaw Capital, for all intents and purposes, is a China-focused real estate investment management business. Founded by Gaw in 2005, after he impressed investors with an Asia telecom real estate joint venture with Morgan Stanley Real Estate Investing (MSREI) that managed to salvage a profitable return shortly after the tech crash, the firm has now raised three funds totalling more than $1.5 billion. The latest fund has a 30 percent provision enabling investments in Vietnam and Singapore, but Gaw Capital is essentially sinocentric.

The main focus today is on second- and third-tier city residential developments, accounting for 40 percent of Fund III’s capital. With an in-house developer on the books – the former Jiangsu province team of state-owned Shanghai Greenland, which has grown to 200 staff in two years – the firm is well placed to invest in its target cities.

Gaw picks ‘blue-collar’ Xuzhou, between Shanghai and Beijing, to exemplify the sort of city in which it is looking to park its capital. Places such as this, he believes, are somewhat ring fenced from China’s ever-increasing, bubble-averting real estate policies. “The Chinese government is still accommodating in tier II and III cities,” he says. “You hear all the talk about measures aimed at reducing borrowings and tougher restrictions on second and third homes, but policy impact really depends on the city. I’d argue that local policy plays a far more significant role. At the end of the day, government budgets mainly come from land sales.”

That said, Gaw is a firm believer of swimming with the political tide. Key to that notion today is avoiding the headline-grabbing luxury residential markets of Shanghai and Beijing. Hong Kong also is out of the question, with Gaw likening investing there to playing in a casino. “We are still very bullish on China,” he maintains, “but there are certain sectors to avoid, like luxury housing in tier I cities. That is where the government wants corrections. I say never go against the government. If the wind blows east, you go east. If it blows west, you go west. Cooperate with policy, and you’ll do quite well.”

Gaw has stuck to this mantra for each of his Gateway funds and, given the quick-changing nature of Chinese policy, the firm’s investment strategy has switched and changed accordingly. He recalls a Shanghai apartment investment made for Gateway China Fund I (closed in 2005 on $198.9 million of equity), which Gaw sold at a 2.7 percent yield – a deal that yielded an IRR of 126 percent.

“Exiting at those prices, I knew I couldn’t go back into that market,” Gaw says. “The government was already pushing tier II and III cities. I realised then we need to be developing in those.” For Fund III, Gaw is aiming to achieve the more standard 20 percent IRRs for its investors, predominately US institutional investors and endowments, although there also are sovereign wealth funds.
Appetite for construction

Gaw Capital is now recognised as one of the larger private equity real estate firms in China – it has 79 staff working on its funds and more than 500 staff across its main offices in Hong Kong and Shanghai and various satellite offices. But its story started in the US. From the Roosevelt success, San Francisco-born Gaw, fresh from an education culminating in bachelor degrees in civil engineering and finance from the University of Pennsylvania and a masters in construction management from Stanford University, grew a US investment business named Downtown Properties.

“It was the early days of the Internet,” Gaw recalls. “I went to downtown Los Angeles and found a building full of telecom equipment and switches used by companies such as Deutsche Telekom and British Telecom. All their cables from Santa Barbara went into this building before being re-routed to the Rockies.” Predicting a burgeoning demand for data as the Internet grew, Gaw snapped up numerous empty buildings in the area, turned them into switching sites before knocking on the door of companies like AT&T to occupy them.

“Most of the property owners didn’t know anything about this,” Gaw recalls. “They didn’t want to pay for all the extra power, air conditioning and other infrastructure that was needed. We did and, in doing so, created a new category of real estate.” Among Gaw’s early tenants was global fibre-based communications services firm Level 3 Telecommunications.

We have turned investors away when they have demanded short investment periods. I might invest sooner than our four-year investment period, but why do you want to force me to invest when I don’t think the time is right?

Goodwin Gaw, Gaw Capital Partners

Gaw stopped investing in US telecom real estate in 1999 after he decided the market had become saturated with other players that had jumped on the bandwagon. “So I went to Morgan Stanley and told them I think I can do the same in Asia,” he says. MSREI backed Gaw’s plans for a joint venture company, providing $160 million of capital. Gaw raised $40 million on top of that, and the company successfully lured some stateside clients to occupy the properties.

The ensuing tech-wreck crisis ushered in a comparative low point for Gaw, however. “Our facilities in Asia were occupied by overseas subsidiaries, and these were naturally the first to go. One of our Hong Kong buildings went from zero percent occupied to 100 percent then back to 30 percent in a short time. Long leases were signed by the businesses, but they went belly-up.” Gaw responded by morphing the properties into regular warehousing, but the business suffered and ultimately was downsized and its assets sold off.  “We ended up exiting everything by 2003, but we did recover a 6 percent IRR net of fees,” he recalls consolingly.

Recovering anything at all sufficiently impressed MSREI to co-invest with Gaw again. Vicwood Plaza, an office building on the edge of central Hong Kong, was bought for approximately $100 million. When it was sold, the partners made more than 6x equity. More importantly, it gave MSREI the confidence to make a rare limited partner commitment to Gaw’s first fund. Angelo, Gordon & Co, another New York industry stalwart, did likewise alongside more conventional limited partners.

The fund subsequently invested in eight assets, some of which are already exited. Gaw won’t be drawn on current return projections for the vehicle, but sources say the firm is looking at net IRRs of about 30 percent and up to 3x equity. Such performance, set against a backdrop of more liberal capital allocations by LPs, enabled Gaw Capital to raise a significantly larger $800 million for Gateway Capital Real Estate Fund II in 2007.

Parallel to this effort, Gaw grew its development arm. That move has proved so popular that today some investors are requesting co-investment rights on its projects, although Gaw says that would be a company first. “I’d have to get all the Fund III investors to agree, but I think it could be a win-win.”

At first, Gaw thought his firm would have a lot of operating partners, but he now knows that it is quite difficult to find quality ones in China, noting that China has two types of partners for firms like his. “The first are the listed Hong Kong developers,” he says. “They have a tonne of liquidity and don’t need my money. If they want it, it’s because the deal is too risky – that’s not ideal for us.” The second category involves developers that are asset-rich but cash-poor. “We had a few partnerships like that, but the problem is, when things go south, they immediately want to cut prices because they need cash to support their team, whereas we might be willing to wait another 18 months.”

In one such scenario, Gaw partnered with a firm on a project in Chengdu. The real estate “fundamentals”, as he terms it, were in place, but the investment was made three months before the Great Sichuan Earthquake, which claimed the lives of more than 60,000 people. As a result, Gaw postponed development for 20 months. “Of course, the IRR took a beating,” he says, “but I had no leverage on the project so I may still generate my target equity multiple.” Although the partner had tried to push through an exit of the project beforehand, the joint venture is progressing more positively today.

“I don’t want the pressure to buy and sell within a certain period,” Gaw states. “We have turned investors away when they have demanded short investment periods,” he adds defiantly. “I might invest sooner than our four-year investment period, but why do you want to force me to invest when I don’t think the time is right? Now that we are on our third fund, I have learned when not to give in to investors.”

Severing family ties

Gaw says one major misapprehension about his firm is that it is a family business. “It’s not intended to be,” he declares. “When I started with Morgan Stanley, my brother Kenny was helping my father with his Asia investments. When I wanted to create my own funds, he decided he wanted to do it with me.” After Kenneth Gaw, 40, helped co-found the company, they were joined by Gaw’s former schoolmate Humbert Pang, previously China head of property services firm Savills.

More non-family senior figures such as chief financial officer Alan Lee and retail managing director Chai Khim Goh have joined the ranks too, and Gaw sees this as integral when viewing the company. The ownership of the company is majority split between the Gaw brothers and other senior executives, but he insists more partners will be able to own a part over time. “I don’t want us to be regarded as a family business because I need to attract high-calibre people,” he adds.

Two years after forming, there was some negative press about a group called Gateway Capital, a US private equity fund where the founder defrauded his investors. My investors called to ask if that was me; I said obviously not

Goodwin Gaw, Gaw Capital Partners

Gaw is keen for new joiners to see Gaw Capital as a company where you can rise to the top and particularly where there is no special treatment for family members – he has no intention of handing his share to his children for example. “Fund management is all about ability and passion,” he says. “I have no idea what they’ll want or what their passion will be. This is not a business I can just hand down.”

Gaw’s hard line is perhaps best demonstrated when considering the hire of sister Christina, 38. “My sister joining was not an easy decision,” he confesses, describing her as “overqualified” owing to her prior senior posts at Swiss bank UBS and Wall Street stalwart Goldman Sachs. But reassurances from both senior colleagues and investors alike persuaded him to bringing her on board.

Gaw has fended off perception issues about his firm before. Gaw Capital initially was called Gateway Capital, with a view to being regarded as a gateway for US capital to Asia, “and hopefully vice versa one day,” Gaw says. But the firm opted to change its name when misdemeanors by companies with comparable names came to light and peers confused the businesses.

“Two years after forming, there was some negative press about a group called Gateway Capital, a US private equity fund where the founder defrauded his investors,” Gaw recalls. “My investors called to ask if that was me; I said obviously not.” Then, a single-asset REIT for a commercial real estate complex in Beijing called Gateway Plaza was found to have two sets of rental books, and again shareholders were defrauded. Rather than wait for event three, Gaw opted to switch the company name to Gaw Capital Partners.

Such identity misconceptions are a thing of the past now. Gaw’s peers describe his firm as “high-profile” and “very professional”, and the man himself as “very well-connected” and a “great marketer”. As one fellow founder of a rival firm puts it: “Family business or not, they’re very professional.” Gaw will be pleased to hear that as he eyes the market opportunities of 2011 and beyond.

Gaw Capital Partners

Founded: 2005

Offices: Hong Kong and Shanghai

Staff: More than 600

Assets under management: $5 billion

Funds under management:
Gateway China Fund I (2005, $198.9m)
Gateway Capital Real Estate Fund II (2007, $800m)
Gateway Capital Real Estate Fund III (2010, $423m)

Sector exposure:
Residential/mixed-use development (32.8%)
Residential development (27.3%)
Office/retail (15.6%)
Retail mall (11.6%)
Hospitality (5.6%)
Mixed-use (4.4%)
Pre-IPO exchangeable bonds (2.7%)

Geographic exposure:
Chengdu (32.8%)
Guangzhou (18.6%)
Shanghai (18.3%)
Hong Kong (7.5%)
Changzhou (6.1%)
Beijing (5.7%)
Xuzhou (5.3%)
Dalian (4.4%)
Philippines (1.3%)