BLUEPRINT: The metamorphosis of Pacific Star

Pacific Star owns a huge plot of development land in Thailand. Lined by mountains, a lake and a national park, the site is located three hours south of Bangkok. There, the Singapore-based real estate investment group wants to bring together a multi-faceted resort, encompassing popular sporting themes such as tennis and golf, in what founder Jeff Tay describes as “a world’s first.”

“I believe, if we can get this branded, we will have a product the customer would surely pay for,” Tay confidently tells PERE. Details of the grandiose project, however, are under wraps as Pacific Star and its partner, a private Thai investor, currently are in the master-planning phase.

More importantly, the project is symbolic of Pacific Star’s latest evolution. The firm, well known for its fund management business, wants to become a development company now. From an interview with Tay and his senior lieutenants, it is clear this is an entrepreneurial firm in transition.

Pacific Star, founded by Tay in 2001, undoubtedly has entrepreneurialism in its DNA, if its colourful and varied history is any indicator. The firm has transacted more than $6 billion in real estate transactions in its time, encompassing a wide range of deals and an arguably wider range of investment partners:

In 2001, through a S$875 million (€528 million; $695 million) co-sponsored fund, Pacific Star introduced ERGO Insurance Group, a German insurance giant, to investments in some of Singapore’s prime offices like Temasek Tower, One George Street and The Adelphi; Four years later, the firm co-listed a S$1.3 billion REIT with the asset management group of insurer Munich RE and Australian banking heavyweight Macquarie. The assets were prime office and retail properties; 2006, Pacific Star arranged a Shariah-compliant vehicle to help the Kuwait government invest $300 million into one of Kuala Lumpur’s largest shopping centres, The Pavillion.

Those deals – elephants, as Tay calls them – have led to some jumbo results. The Macquarie Prime REIT, for example, was over-subscribed by more than 30 times, according to Pacific Star’s corporate literature, which outlines “superior investment returns” as well. Last year’s S$889 million sale of Singapore monolith Capital Square, following a decade of proactive asset management, heralded an IRR of 30 percent. Its 2006 exit from an initial S$200 million stake in Shui On Land, the property development arm of Hong Kong conglomerate Shui On Group, generated an even more impressive 100 percent-plus return.

Pacific Star has served as a steward of third-party capital and as a conduit for international capital to real estate across Asia. From advising transactions between big hitters in its earliest days, it became a large private equity real estate firm in its own right, raising big funds and taking down large deals. Such early positives, however, do not stop Tay from magnanimously admitting: “We are still subject to the winds of the world.”
Soup du jour

By Tay’s own admission, Pacific Star, along with most of its fund management peers, has found the conventional capital-raising environment challenging since the collapse of Lehman Brothers in 2008. “We were trying to build a table on legs that were only institutional, and we were caught,” he admits. Listing different types of investors, he jokingly says many had ‘Do not disturb’ signs on their doors.

If the soup du jour is not mushroom soup but chicken soup, then we’re going to serve chicken soup.”
Jeff Tay, Pacific Star

As a result, the firm’s latest fundraising effort, Pacific Star IV – Asia Fund Select, a pan-Asia multiple-risk strategy fund originally slated to attract $1 billion, was shelved shortly after its launch after failing to gain traction with investors. That fund itself was a mesh of two other previously aborted fund attempts – one an open-ended core fund and the other a closed-ended fund aimed at making entity-level investments in Asian real estate companies.
“We are reactive to the market,” Tay says. “If the soup du jour is not mushroom soup but chicken soup, then we’re going to serve chicken soup.”

Indeed, Tay prides himself and his firm on evolving to create something wanted by his customers at all times. Peers and former colleagues agree with this self-appraisal – that is how he and Pacific Star are wired.

In listening to Tay and his enthusiasm for the aforementioned Thai development, you wouldn’t guess he turned 60 in August. As one ex-colleague quips: “He could talk the birds down from a tree,” such is his magnetism. xtroverted, flamboyant at times, perhaps even mercurial, but there is undeniable substance behind what he says.
Tay has proven a deft hand at successfully reading market conditions before, and he’s determined to do so again. Inspired by real estate pioneers like John Rockefeller and Walter Shorenstein, He says he’d love to develop real estate in Asia that can lift the spirits of a community as those men have done in the US.

Tay has his supporters too. Thomas Kabisch, chief executive officer of Munich ERGO Asset Management, lauds Tay’s “reaction speed” and “negotiating prowess,” while underlining the importance of Tay’s continual control over the company’s direction. “As its founder and the driving force behind Pacific Star, Jeff Tay is the guarantor of our constant and successful participation in the rapidly growing Asian real estate market,” he says.

The master’s plan, part I

Part of a wider two-pronged strategy by Pacific Star to cement its place as a development partner of choice, the Thai development is a component of the Southeast Asia strategy, dubbed Project Quantum. Through an entity called Pacific Star Development (PSD), Tay’s firm has identified and “pre-qualified” developments in Singapore, Malaysia, Thailand, Indonesia and Vietnam. PSD would take majority positions in each development – “Even if you have the money, never do 100 percent equity as a foreigner,” advises Tay – with a view to enabling investors to take positions in the company via shares bought on the listed market.

The entity is led by president Glen Chan, a trusted lieutenant who joined Pacific Star in 2003 and previously was responsible for structuring the Baitak Asian Real Estate Fund, the fund co-managed with the Kuwait Finance House – an investment house 49 percent owned by the Kuwait government – and responsible for the development of the Pavillion in Kuala Lumpur. That property, which already has been partially sold to the Qatar Investment Authority, was spun off to a new REIT in the last quarter of last year. For Project Quantum, Chan will be overseeing the development of mixed-used city centre schemes, resort hotels and villas, retirement communities and high-tech industrial and logistics parks.

“We will be looking to capitalise the company with new investors,” says chief corporate officer Alfred Lim, as PERE questions from where Pacific Star’s capital would come. In addition to Pacific Star resources, he notes that adding external capital would likely happen over two phases. The first would involve cornerstone institutional investors and possibly high-net-worth individuals and family offices. For the second, more crucial phase, Pacific Star has identified a listed company – the name of which cannot be disclosed at this stage – with which to merge PSD and into which investors can then buy positions via the public markets, gaining liquid access to PSD’s pipeline in the process.

In the wake of the Lehman crisis, people need more sovereignty, which is why you see they have been more active than just relying on indirect funds
Jeff Tay, Pacific Star

Tay explains the philosophy behind taking this route. “In the wake of the Lehman crisis, people need more sovereignty, which is why you see they have been more active than just relying on indirect funds,” he says.
Depending on liquid capital brings its own challenges, however, and Tay recognises that. “I don’t think it’s a slam dunk,” he says. But, stoically, he adds: “I have taken the route where investors are afforded more flexibility.”
Crucially, Tay is convinced Project Quantum offers something stock investors cannot get elsewhere. “There is no other entity on any stock exchange from Jakarta to Vietnam that has a strategy like ours and takes in 650 million people in Southeast Asia,” he says.

Master plan, part II

The other part of Pacific Star’s strategy focuses on China. Under the direction of chief financial officer Yoong Chow Cho, this strategy is less glamorous than Project Quantum, but it shares the central premise of ultimately offering something retail investors can access. “This will be an excellent opportunity for investors to come into the Chinese real estate market through a listed entity,” Cho says. “That brings with it good governance, liquidity and transparency – the best of both worlds.”

In terms of the actual real estate, Pacific Star sees the development of townships as most viable and, essentially, “in tune with what the government wants.” In line with recent PERE interview subjects Gaw Capital Partners and CITIC Capital, Pacific Star believes in swimming with China’s political tide. “We want to help take the pressure off the cities,” Cho says, pointing to metropolises like Beijing or Chongqing that he describes as “bursting at the seams. Some are past 20 million people and can’t take it.”

Talking through a flipchart, Cho reveals prospective schemes of between one million square feet to three million square feet, typically located within commutable distances from China’s major cities. One of Pacific Star’s potential Chinese development projects is part of a $2 billion scheme being developed over a 21.5 million-square-foot area close to the Pearl River Delta. Scheduled for completion in 2014, the scheme should comprise copious residential properties, recreational facilities, more than one million square feet of commercial space and a luxury hotel.

Outlining further projects, Cho says: “We have a project about one-and-a-half hours from Shanghai, where the cost of living is lower. Its new land, so we can do proper master planning. The game for us is to roll out these townships across China. We have about 20 we intend to roll out, and three of these already are under construction.”

The king’s class

After more than 10 years successfully and cautiously growing the firm, it is the right time to arrive at the king’s class: real estate development
Eckart von Freyend, formerly chief executive officer of German property company IVG Immobilien

It’s one thing to have aspirations to change business models, and another for it to work. Eckart von Freyend, formerly chief executive officer of German property company IVG Immobilien, is a member of Pacific Star’s international advisory board. He believes the firm’s track record of executing deals via various investment structures, including the public markets, will indeed carry favour when demonstrating its potential to prospective investment partners. “After more than 10 years successfully and cautiously growing the firm, it is the right time to arrive at the king’s class: real estate development,” he says.

von Freyend admits that the Lehman effect has had its impact, but he believes European investors will continue to back Tay and his firm. In his experience, European investors that backed Pacific Star in the past “went home with double-digit results.” While many are reluctant to back funds at the moment, he says: “I trust that, in the future, German and European real estate investors – private and institutional – will come back to explore the huge possibilities offered by the Asian markets and by Pacific Star.”

An ex-senior employee, who asked not to be named, also believes Pacific Star has the capabilities to make an impact in the development arena. “They have people who have done development, who know how developers think and what risks one should look out for,” he says. “That is where they can add value with the teams they have on the ground.”

However, despite recent liquidity issues being faced by developers large and small in China, the ex-employee predicts Pacific Star could struggle to form a stable of partnerships with the country’s best developers, which can access public capital with more ease. Working with “third or fourth tier developers,” as he termed them, can be harder as they tend not to operate to the same standards of corporate governance expected by a firm like Pacific Star. “It’s not an easy proposition,” he says, “but I wouldn’t put it past Jeff to pull it off.”

The F-U-N-D word

Certain critics of Pacific Star say its evolution to a developer was forced by the departure of various senior personnel. Pacific Star says its evolution from an emphasis on fund management resulted in those departures. Whatever the catalyst, in a variety of circumstances, the predominantly fund management-orientated folk at the company have moved on.

In October, Benett Theseira, director of investments and private equity, left to take on a fund management job at Pramerica Real Estate Investors. He was responsible for launching the firm’s €1.2 billion Asia Real Estate Income Fund in 2006 and latterly was leading capital-raising efforts for Pacific Star Asia Fund IV– Asia Fund Select. He followed long-serving president Frank-Rainer Vaessen, who left in July 2010 to “attend personal priorities” in his native Germany.

It’s not an easy proposition,” he says, “but I wouldn’t put it past Jeff to pull it off
Unnamed former employee of Pacific Star

Various partnerships bearing the Pacific Star brand recently have been dissolved as well. In February 2011, the 10-strong Hong Kong team, under the leadership of property veteran Wilfred Wong, spun out to form investment firm Pinnacle State Group. Shortly before that, in September 2010, Pacific Star Europe, in which Pacific Star owned a controlling 51 percent stake, was wound down after principals Matthias Sturmer and Dirk Grosse-Wordemann called time on a fund of funds originally expected to provide a conduit for European investors to invest in Asia real estate. Sturmer joined Swiss alternative assets investment business Capital Dynamics, while Grosse-Wordemann joined German bank Aareal.

Tay maintains all these separations were mutually agreed, but he acknowledges that differences of strategic opinion played their part too and common to each situation was the F-U-N-D word. “If you’re chasing something that is not income-generating or profit-generating, then you aren’t adapting to the marketplace,” Tay says. “At that point, it’s over.”

Despite the attrition of certain fund managers, Lim stresses that conventional fund management is not an arena Pacific Star is leaving and refers to it instead as a capacity currently not needed. “We are not moving away from funds,” he says. “The time may come back three years down the road.”

Tay adds that, when the time is right, Pacific Star Asia Fund IV– Asia Fund Select could well be reintroduced to the marketplace. However, in keeping with Tay’s central business premise, there must be buyers and sellers for such a product. Today, he doesn’t think there is and so Pacific Star will not push in that direction.
Looking ahead

Whether Pacific Star’s new direction will work will become evident in the months and years to come. Its prior successes and dexterity in the market are clear to see given the sheer diversity of transactions racked up during its first decade, and PERE has been shown a trail of steamy returns for sure.

Changing times, however, have brought challenges both for the company and the markets it faces. In addition, there has been attrition in the firm’s senior ranks and its new strategy is just that, new. More certain is Tay’s dogged ambition to succeed, and he clearly believes Pacific Star will do just that.

Tay’s full Chinese name is Tay Toh Hin: Toh meaning earth, and Hin meaning luck. According to one definition, the Year of the Dragon, which falls this year, is associated with the earthly branch symbol and is considered the luckiest year in the Chinese zodiac. Perhaps 2012 also will be the year in which Pacific Star once again shines brightly.

Major funds

Pacific Star IV – Asia Fund Select

Launched: 2010
Status: Currently not in market
Target size: $1 billion
Type: Closed-ended
Strategy: core, value-added and opportunistic residential, retail and offices
Target markets: Japan, Korea, China, Hong Kong, Macau, Taiwan, Singapore, Malaysia, Thailand, Indonesia, Vietnam
Investor profile: Institutional investors, multi-managers, family offices and high-net-worth individuals

Asia Real Estate Prime Development Fund

Launched: 2007
Status: Closed
Total equity: $250 million
Type: Closed-ended
Strategy: Opportunistic development of luxury residential, serviced apartments and mixed-use properties
Investment locations: China, Hong Kong, Japan, Korea, Thailand, Malaysia, Singapore
Investor profile: Institutional investors from Europe

Asia Real Estate Income Fund

Launched: 2006
Status: Closed
Total equity: €500 million
Type: Closed-ended
Strategy: core-plus, income-producing commercial and residential assets
Investment locations: Singapore, Malaysia, Thailand, Hong Kong, China, Japan and Korea
Investor profile: European, Middle Eastern and Asian institutional investors, including Munich ERGO Asset Management (the fund’s joint manager) and Singapore insurance group Great Eastern Life

Baitak Asian Real Estate Fund

Launched: 2005
Status: Closed
Total equity: $300 million
Type: Closed-ended, Shariah-compliant
Strategy: Opportunistic development of mixed-use
Investment locations: predominantly Malaysia
Investor profile: Kuwait Finance House (49 percent owned by the Kuwait government