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ASIAVIEW: The small picture


Jonathan
Brasse

There appears to be a disconnect between investor sentiment for Asia real estate and the amount of capital actually raised for the stuff. A bold statement to be sure, but PERE’s own figures would seem to give it support.

At last month’s PERE Forum: Europe in London, 56 percent of the conference delegates said Asia would be the easiest region to raise capital for, dwarfing the 37 percent that voted for the US and the paltry 7 percent that nodded to Europe. When asked which region deserves a long-term perspective, 47 percent pointed to Asia, ahead of 34 percent for Europe and 19 percent for the US. That was a largely European crowd humbly conceding that Asia had the better credentials for investors. Naturally, their thoughts were underpinned by the region’s relatively better growth prospects.

So why does PERE’s back-of-book Capital Watch section, which lists value-added and opportunistic funds in market and fund closings, show barely over $1.1 billion raised for Asia during the first six months of the year? Even accepting that global capital-raising remains a scant affair, that apples-for-apples comparisons are harder to make on account of the increasing number of diversely structured offerings and even entertaining the prospect that our coverage could have gaps, that half-year total appears out of kilter with what is said in public forums like our conference.

PERE isn’t alone in its observation. Global placement agent Probitas Partners’ first quarter fundraising report shows that only 11 percent of the $9.1 billion raised by the real estate sector was earmarked for Asia, well shy of the 23 percent raised for Europe and the altogether more impressive 52 percent raised for North America. Granted, we use slightly different metrics, but thematically we’re on the same page.

Viewers of our online coverage will note Pamfleet International’s second closing for its Hong Kong- and Singapore-focused fund as evidence that some success has occurred in pockets of the market.  A much bigger closing from Macquarie Capital’s real estate division for a China retail fund should grace the PERE website soon, but the fact we’re plucking names in this manner speaks volumes in itself.

A picture of wildebeests and zebras milling about besides Kenya’s Mara River comes to mind. As any safari-lover knows, it can take hours, even days, before one attempts a crossing. When it happens, the movement of others crossing in unison is breathtaking

One possible answer as to why sentiment doesn’t seem to mirror action, even on a relative basis to the wider constrained capital-raising market, might lay in a conversation PERE had last month with an Asia-focused fund of funds manager. Like countless other investors of varying types, this manager is sitting on the market sidelines despite having dry powder. He talked of numerous funds in market that are on his list but still awaiting a first closing. The thing is he doesn’t want to be the first into one of these funds just to find that nobody follows.

A picture of wildebeests and zebras milling about besides Kenya’s Mara River comes to mind. As any safari-lover knows, it can take hours, even days, before one attempts a crossing. When it happens, the movement of others crossing in unison is breathtaking. The fear of the first, of course, is the lurking crocodile under the water.

Keen not to be exposed as a lone wildebeest, this fund of funds manager has adopted a tactic of coercing three to four other LPs to join it in picking a specific fund and piling into it together. Between the LPs, the commitment in question totals approximately $150 million. To quote him: “Of the few first closings we’re looking at, we don’t want to be the first ones in. There’s better safety in numbers.”

The manager pointed to a Chinese fund with just one $20 million commitment from an investor forced to sit pretty until joined by its peers. In this instance, the GP is not earning enough in fees to survive, he said, and the LP is stuck in a fund unable to buy in any meaningful way. “As a result, they are stuck in limbo,” he added.

It is a truism to suggest that a GP’s track record is counting for an awful lot at the minute, and many small to mid-sized Asia-focused managers have not, at the corporate level at least, attained the prerequisite experience to convince that all-important institutional allocation panel sitting in The Hague or Sacramento, California. This is often true even if the individuals running those firms have the necessary gray hair.

In addition, many of the larger firms either have exited the market post failures or are trudging on while simultaneously licking their wounds. Some of those include zombie firms just treading water until their inevitable drowning, but how much of the nearly $21 billion in Asia-focused funds listed as “in market” in PERE’s Capital Watch reflect those? The answer likely is not many at all.

Let’s face it, despite the countless utterances of positive investor sentiment towards Asia to grace the conference circuit, including at PERE’s own events, 2011 is shaping up to be something of a dud in terms of actual capital reaching Asia-facing managers. It would be good to eat these words come PERE’s annual review, but that looks unlikely to happen, particularly when you consider the wildebeests currently meandering in the field.