The first time PERE highlighted ‘blind-pool club vehicles’ was back in March, immediately following our annual forum in Hong Kong. At the time, one investor admitted to having backed such a vehicle in the US and predicted they would appear in Asia before too long. Evidently, that time has now come.
In Japan, Tokyo-based Secured Capital has teamed up with Aviva Investors to launch such a vehicle as they seek to execute a core-plus office strategy. Neither firm would comment, but it is understood that the 12- to 18-month venture is expected to attract investments from between three and four investors, totalling between $250 million and $300 million in equity. Assuming 50 percent leverage, the vehicle could have firepower of between $500 million and $600 million once fully raised.
The vehicle has been tagged as a blind-pool club by virtue of it not having pre-specified investments, as is custom in most club transactions. Instead, Secured Capital and Aviva, the latter via its direct investment platform led by chief executive officer Ian Hally, would operate within a prescriptive and tight set of investment parameters as they source deals. A further incentive for investors backing this vehicle comes in the form of approval rights over acquisitions, exits and other major decisions made by the joint managers.
From PERE’s conversations, it appears that the omens are looking good for Secured Capital and Aviva in getting the venture off the ground. “We’re evaluating it at the moment, but we would probably do it,” said one investor who wished not to be identified. “In some ways, this demonstrates how the industry is changing structurally and permanently, not just cyclically.”
Since the start of the global financial crisis, there has been something of a widespread reluctance by institutional investors to back traditional blind-pool commingled funds, where limited controls are offered. That has led to certain fund managers creating hybrid investment products with varying degrees of manager discretion.
The investor added: “Generally, investors are cautious about doing anything blind, but this is quite focused and realistic in terms of capital size and how fast capital can be deployed. [Also], in this instance, we actually have quite specific control positions.”
A joint venture with Aviva Investors would be the second vehicle to be brought to market by Secured Capital in the second half of the year. In August, the firm led by president and chief investment officer J-P Toppino launched its fifth opportunity fund, Secured Capital Real Estate Partners (SCREP) V, for which it expects to raise a record $1 billion. There should not be any overlap in strategies between the two vehicles, however, as the joint venture is hunting core-plus investments with a return expectation of 10 percent to 12 percent, as opposed to the predominantly opportunistic distressed debt investments expected of SCREP V that are intended to return between 17 percent and 20 percent.
Join the queue
While their plan for a blind-pool club vehicle is somewhat innovative, Secured Capital and Aviva are among a number of investment firms plotting a core-plus strategy for Japan’s office market at the moment. Other firms hoping to raise capital for this market segment include AXA Real Estate Investment Managers and MGPA.
The catalyst behind this swathe of core-plus investment vehicles is a widening belief that Japanese rents – and, subsequently, capital values – are bottoming out and that the Tokyo market in particular is poised to bounce back. Aided by comparatively cheap debt, this consensus supports the 18-month investment lifespan mapped out by the Secured Capital and Aviva joint venture.
That view also was supported by Hidetoshi Ono, head of AXA’s joint venture fund with Sumitomo Trust & Banking, in a recent interview with PERE. According to Ono, yields for Class A- to B+ offices in Tokyo have moved out from recent peaks of about 4 percent to higher than 5 percent today and that has provided an opportunity for those with lower risk/return requirements than those typically offered by opportunity funds. “It’s difficult to call the bottom of the market, but I think it’s now,” Ono said at the time.
Secured Capital and Aviva Investors have added their brands to a growing list that agrees. Whether the number of blind-pool clubs in Asia increases will be borne out over the coming years. Given the cautious approach currently displayed by many investors, however, that would not be at all surprising