InfraRed Capital Partners, the real estate and infrastructure investment management business spun out from HSBC last year, is back on the fundraising trail with its second Chinese real estate fund, InfraRed NF China Real Estate Fund II, PERE has learned.
Buoyed by strong current performance in its first fund, InfraRed is confident its investors will commit capital to the sequel. The first vehicle – a 2007 vintage effort that attracted $707.7 million in equity and is now fully deployed into 16 projects, four of which have been exited already – is understood to be generating an IRR close to 20 percent, in line with typical opportunistic targets. InfraRed’s new investment vehicle could achieve a similar capital-raising mark of $700 million.
Arguably just as significant, however, is InfraRed’s repeat agreement with Hong Kong-based real estate and textiles giant Nan Fung Group, its 50:50 joint venture partner for Fund I. As with Fund I, Nan Fung has agreed to provide the fund with exclusivity to its deal pipeline until the investment period of the fund – three years in this case – has expired. In essence, InfraRed has re-inherited a long-established and trusted partner to source transactions, which is widely seen as a must-have for foreign capital providers seeking an effective foothold in the Chinese real estate market.
Nan Fung, established in 1954 as a textiles business, went on to make an impact in property by developing more than 130 projects, comprising 50 million square feet, to date, according to its marketing. It has been a client of HSBC for more than 50 years and a limited partner in the funds of InfraRed’s previous incarnation, HSBC Specialist Investments, making the two groups familiar bedfellows.
One source, who could not be named, noted that the nature of the partnership between InfraRed and Nan Fung was a key consideration in terms of gauging future successes. He said: “[Nan Fung] were prepared to provide a co-investment right to their deal flow, whereas a number of other potential partners were not prepared to do that.” By contrast, other partnerships between foreign capital managers and domestic developers often entail a bespoke and limited portfolio of assets, he explained.
One partnership not certain to be repeated is that with Tesco, the world’s third-largest retailer by revenue. In Fund I, InfraRed and Nan Fung partnered with Tesco on the development of six shopping malls anchored by the retailer. Regardless of whether a partnership is repeated, retail will still figure prominently in the fund’s investment thesis. While certain rivals have leaned towards a direct focus on servicing Chinese consumers, this fund is likely to be approximately 45 percent dedicated to retail. For the rest of the capital, 30 percent is expected to be deployed into residential deals and 25 percent into offices. Some logistics investments might happen as well.
Furthermore, a portion of the capital is expected to be injected into mezzanine financing situations, a timely area of focus for private equity in light of recent Chinese government policies aimed at stemming finance sources in its property markets in an attempt to cool them. Depicting a window of between six and nine months, PERE’s source said: “There’s an opportunity created for offshore capital to lend to Chinese developers for sure.”
Whether influenced principally by performance or the re-instatement of nuptials between the fund’s partners, investors already are believed to be committing capital. At press time, initial equity already has been soft-circled, with a first closing expected to happen shortly. In addition, InfraRed is taking the fund to a wider net of institutions this time around, with New York-based Greenhill & Co appointed to attract further investors to join the firm’s existing stable of LPs. InfraRed would not comment when approached.