ASIAVIEW: The circle of life


Days before last month’s PERE Forum: Asia, one GP coming to market with a fund told PERE: “It’s a great time for LPs to commit money to a fund because they’ll get such a great deal.” The GP was offering a fee structure with pooled and back-ended carry and no acquisition fees, among other incentives. “The management fees we charge are really just to keep the lights on,” he added.

As the two-day event in Hong Kong unfolded, however, it became clear, particularly among the world’s largest investors, that cheaper fund costs are not going to dislodge the current preference for club investments. Indeed, single-asset clubs involving two or three like-minded investors and one manager currently are en vogue. Sydney-based Goodman Group’s ongoing A$2.5 billion privatisation of ING REIM’s ING Industrial Fund in Australia with Algemene Pensioen Groep (APG), the Canada Pension Plan Investment Board (CPPIB) and China Investment Corporation (CIC) is one example.

Shortly after the conference, however, PERE met with one large LP that said it had just signed up to a “discretionary club” – a hybrid vehicle between a non-discretionary club constructed for a series of deals, like Brookfield Asset Management’s Real Estate Turnaround Consortium, and a traditional blind-pool, commingled fund. The discretionary club also comprised a small handful of large investors, in this instance each committing $100 million alongside a sector specialist manager. The key differentiator is that the manager has full discretion to make investments, albeit within very tight parameters. This LP also is considering another such discretionary club in Asia.

It was from that conversation that it became clear that manager discretion is an excellent indicator to determine any given point in the market cycle. Put simply, after the global financial crisis, managers introducing new products struggled to attract the world’s largest investors unless they ceded discretion. Today, as markets rebound and market clearing prices become more prevalent, these same investors are thawing to the notion of returning discretion, if PERE’s conversation with the above LP is anything to go by.

It was from that conversation that it became clear that manager discretion is an excellent indicator to determine any given point in the market cycle

Let’s consider the evolution so far, starting with Brookfield’s titan club. Conceived immediately after Lehman Brothers’ collapse in September 2008, the Toronto-based alternative investment business brought its Turnaround Consortium to market a year later. In a dire fundraising environment, here was a platform able to attract $5.5 billion, including commitments from CIC, CPPIB, the Government of Singapore Investment Corporation and Australia’s Future Fund. Central to its investment thesis was the offer of first refusal on deals that met its strategy, predominantly focused on “undervalued” real estate including companies, portfolios, debt and equity. Cue investments such as the $6.8 billion rescue of US mall REIT General Growth Properties (GGP) – a deal that Collin Lau, global real estate head of CIC, labelled “once in a lifetime”.

Two years later, the non-discretionary club model appears outmoded. Bruce Flatt, Brookfield’s chief executive officer, said as much at last June’s PERE Forum: Europe. He explained that the consortium was “something different”, hatched when “it was impossible to raise a large fund to deploy into opportunities like GPP.” Brookfield’s next effort will assume more discretion.

Comparable opportunities to GGP are unlikely to surface now. True, some situations like the sale of Australia’s Centro Properties Group, have yet to be concluded, but it is unlikely another non-discretionary club for multiple deals will surface. Today, the investors in Brookfield’s Turnaround Consortium are engaging in single-deal clubs.

The recapitalisation of Colonial First State Global Asset Management’s A$1.1 billion open-ended, unlisted retail fund last August is another example to add to the list of single transaction clubs. Here, CPPIB and Future Fund have injected A$375 million each into the nine-asset portfolio, assuming decision-making rights in the process. Guy Fulton, portfolio manager at CPPIB, said at last month’s Forum: “We’ll see more of these.”

Tellingly, neither Fulton nor ex-Abu Dhabi Investment Authority chief investment officer Mark Burton, the onstage interview subject at the Forum, would close the door on traditional discretionary blind pool funds, with Fulton stating they would be employed when “we didn’t have the resources to access the real estate”. A glance at PERE’s coverage reveals Burton’s replacement, global head of real estate Bill Schwab, and APG’s head of non-listed real estate for Asia, Daan Van Aart, saying similar things. Blind pool use is relative to each particular institution, but they are not off the table.

For smaller investors, rhetoric of clubs is largely irrelevant. The decision is blind pool funds or abstinence. For most, it is the former. With buyer/seller divides narrowing the world over, they want to play again and will commit to traditional models, albeit on better terms than those pre-Lehman and generally to country- and sector-specific strategies rather than pan-regional or global funds. For them, control comes in determining the scope of the manager.

That brings us back to the conversation with the LP after the Forum. Doesn’t the discretionary club sound just like a smaller version of a country- or sector-specific fund? The LP admitted as much: “Yes, it’s cyclical,” he said, noting that the US savings and loan crisis ultimately spawned blind pool funds in the first place. “I wouldn’t be surprised if the same happened again.”

Call it the circle of life.