HSBC, the London-based global bank known for its corporate slogan ‘the world’s local bank’, last month completed the sale of its international infrastructure and private equity real estate platform to senior management.
The spinout of HSBC Specialist Investments Limited (HSIL) was noteworthy in two respects. First, it is a large platform, with around £35.1 billion ($52.6 billion) in gross assets. Second, the decision to sell was driven by the regulatory environment, despite the absence of any actual legal requirement to sell the business.
Werner von Guionneau, chief executive of InfraRed Capital Partners, which is the new name of HSIL, said HSBC decided to spin out the group because of a number of regulatory initiatives in the US and in Europe that appeared to make it very difficult for banks to continue their involvement in the private equity sector. “I don’t think there is a single hard legal requirement in the regulatory environment that applied to our business, but the private equity businesses require banks under the new Basel laws to underpin significantly more equity than in the past,” he said. The figure has yet to be concluded, but the evidence is clear: “It would be a multiple of what it used to be,” he added.
The sale by HSBC means about half of the global banks with a substantial European private equity real estate funds business have separated out. However, unlike banks such as Citibank, HSBC has decided not to sell the whole business. Instead, it has retained a 19.9 percent stake in InfraRed – the same stake the bank decided to retain when its Asia private equity business was spun out late last year. It also follows the model created when Montagu Private Equity spun out in 2003.
The 19.9 percent figure is not just an arbitrary one. By keeping ownership below 20 percent, the bank will not have to comply with accounting rules requiring it to consolidate its debt, which is when the results of subsidiary operations are combined with the parent company to present financial statements.
Consolidation of debt is a significant factor in the case of InfraRed because its infrastructure projects are very sizeable in terms of the loans taken out. By keeping the holding below 20 percent, the relationship between investor and investee is described as being only ‘related’, whereas a 20 percent to 50 percent holding has an ‘associated’ status. From an accounting perspective, an associated investor has higher regulatory capital requirements.
HSIL, incidentally, started out life in the mid-1990s predominantly as a greenfield investor involved in social infrastructure projects. It built infrastructure assets, which is how it linked in with real estate. HSBC acquired it in 2000, and it remained a standalone business until the recent spinout. In homage to its roots in both asset classes, the senior management team at HSIL decided upon the name InfraRed because it is an amalgamation and anagram of ‘infrastructure’ and ‘real estate development’.
Stuart Jackson, head of InfraRed’s real estate business, said a key difference between Infrared and many American banks is that US banks tend to focus more on indirect investment in real estate by using structured products. In contrast, HSIL focused much more on the direct underlying real estate through repositioning and development. “That is one of the reasons why the track record has been very resilient through the crisis across all the funds,” said Jackson.
The current focus of InfraRed’s real estate business is Asia and Europe. In Europe, it has around €200 million left to deploy from its HSBC European Active Real Estate Fund, which corralled €400 million in 2008. The fund is focusing predominantly on Germany and Central Europe, especially Poland, in order to complement to its exposure to UK real estate. It recently closed on a logistics property in Hamburg and is close to deals in Munich and Poland.
The other main area of focus is China, for which it raised $710 million through its HSBC NF China Real Estate Fund in 2007. It has committed $600 million of the fund’s equity to 11 projects over the last four years, including a 50 percent interest in six shopping centres with British supermarket group Tesco in a $280 million deal. It has exited four of the 11 investments it has made so far, and the business is expected to market a follow-on China fund soon.
Including infrastructure, InfraRed has $4 billion in equity under management and 80 staff dispersed among offices in London, Hong Kong, New York and Paris.
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