Composition Capital, the Amsterdam- and Hong Kong-based boutique firm known to count Harvard Management among its roster of blue-chip investors, up until now has been identified as a fund of funds manager. However, fund of joint ventures might be a more accurate description, given the proposed focus of the firm’s next two investment vehicles.
Founded in 2005 by Erwin Stouthamer, Composition has spent the last seven years building up a fund of funds business, raising four opportunistic vehicles – two in Asia and two in Europe. Since then, it has become clear that fund of funds managers have been going through a bit of a re-incarnation in terms of the way they commit capital, and the trend clearly has reached Europe. No longer is it a given that Composition will continue to make fresh investments exclusively or even partially in underlying funds, for it is looking to raise follow-up vehicles specialising in joint venture partnerships.
In an interview last month, Morag Beers, director of investor relations, said Composition has arrived at a fully-formed strategy that will see it target a fundraise of up to €250 million for investments in northwestern Europe with joint venture partners in non-traditional property sectors, such as specialised residential, education and health-related properties. Such niche strategies tap into economic growth areas of the economy and lend themselves well to the joint venture format given the more specialised and smaller-scale nature of local operators, she explained.
In another departure from its traditional business plan, Composition’s European vehicle will not be opportunistic, rather it will be closer to a value-added strategy. Such investments would offer a 10 percent to 12 percent net internal rate of return to investors.
Meanwhile, Composition is seeking to raise $300 million for its next Asia fund, which similarly will seek to form joint ventures with local partners. It will be an opportunistic fund focusing on development and debt recapitalisation predominantly in the residential and office sectors, again with a focus on partnering with local operators with niche strategies.
Composition arrived at its new strategy after examining which aspects of its four fully-invested funds had delivered the most to its limited partners. “In Asia, we see that there are some very good real estate people that have not emerged into the fund market and may opt never to do so,” Beers said. “For some, it is a matter of being too specialised and niche to be able to access the institutional market, which is a bit ironic as those typically are the more successful operators one would like to give money. These firms understand the need to create a good result from each and every asset.”
By forming joint ventures with such specialised operators, Beers argued that capital can be deployed more quickly and returns can be provided to investors in a shorter timeframe. At the same time, Composition is trying to keep the advantages of the fund of funds model, whereby it offers investors access to a diversified pool of partners. “We recognise in many investors the need to be closer to the deals themselves rather than commit to underlying funds,” she said. “Joint venture investments offer this.”
Composition already has made some investments in this manner in both Europe and Asia, including Japan, Macau, Vietnam and Taipei. The latter involve urban regeneration projects with a focus on retail and residential properties.
“While we will not leave the fund of fund space completely, we believe that the JV strategy offers the best opportunities given current market conditions, where it is almost impossible for small-cap operators to raise capital,” Beers said. “Ultimately, it is our role to create that viable link.”
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