ASIA NEWS: The call of the frontier

Cube Capital, the London- and Hong Kong-based alternatives investment firm, has decided the time is right for a real estate fund targeting Asia’s frontier markets.

The firm, which operates mainly multi-manager and single-strategy hedge funds in its $1.3 billion portfolio, already has made early real estate forays in Myanmar, Mongolia and Vietnam on a deal-by-deal basis. Now, it is looking to replicate these efforts through a commingled vehicle, which it launched last month.

We were trawling the market even before Aung San Suu Kyi was released
Tom Holland, Cube Capital 

The capital-raising target for the Cube Asia Frontier Fund is a modest $150 million, and Cube Capital hopes to hold a first closing during the fourth quarter. Despite the firm’s optimism, most institutional investors are weary to tread in the new fund’s target markets, which have suffered from political and social instability. Accordingly, Cube is targeting a 25 percent return, higher than typical opportunistic strategies.

“People need a decent return to be in these markets,” said Thomas Holland, Cube Capital’s head of Asia. “We understand that.”

Holland acknowledges that there are no guarantees with any of these markets. However, he and his colleagues have witnessed catalytic events in Myanmar, Mongolia and Vietnam that he said warrants the introduction of the fund.

Early forays

In Myanmar, the world’s media glare has centred predominantly on the election of long-time political prisoner and Nobel Peace Prize winner Aung San Suu Kyi to the lower house of parliament in April – the very picture of the country’s nascent democracy. For Cube Capital, however, the recent suspension of sanctions by the EU and US pledges to ease its ban on US financial services and investments were critical factors behind deploying capital in the country.

“We were trawling the market even before Aung San Suu Kyi was released,” said Holland. Since November 2010, when the country held its first polls in 20 years, Myanmar has passed new labour laws allowing unions and has actively sought to reduce the state’s role in its economic sectors. According to a report by the BBC, Myanmar also is planning a “privatisation commission” to increase private investment. “I don’t think these forces of change can be turned back,” he added.

Cube Capital’s initial investment in Myanmar is a 1,700-strong villa development in the capital of Naypyidaw, in which it funded “latter stage” construction for a 30 percent preferred return. “We expected those villas to sell out in 12 months, but they sold out in six weeks,” Holland said.

In Mongolia, Cube Capital has followed the ‘unlocking’ of certain ‘mega mines’ following the August 2009 repeal of the country’s windfall profits tax on the mining of copper and gold. “That’s ushering in a crazy J-curve for GDP growth” said Holland. Indeed, in the first quarter this year, Mongolia recorded GDP growth of 16.7 percent, the best first quarter in a decade, according to the National Statistics Office of Mongolia.

Piggybacking on Mongolia’s resources-led growth, Cube Capital engaged with another residential developer suffering from liquidity issues, buying a 25 percent stake in a nearly completed project in Ulaanbaatar. “We exited to realise about a 35 percent IRR,” Holland said, adding that the firm currently is evaluating a further investment in a retail centre.

People need a decent return to be in these markets. We understand that.
Tom Holland, Cube Capital

Vietnam has a comparably more investor-friendly economy. However, in the first quarter of 2012, the country reported GDP growth of 4 percent – its slowest rate in three years. Looking to accelerate growth to between 6 percent and 6.5 percent, the government plans to focus on restructuring its financial markets, partly by consolidating state-owned businesses and enabling more private sector activity.

Holland believes such action will yield real estate opportunities, so Cube Capital already has made two investments in Ho Chi Minh City – a commercial development (already exited to realise a 22 percent IRR) and a residential development.

He who dares

“Why do we need to invest in Burma, Vietnam and Mongolia to get 20 percent-plus when we can get that elsewhere?” asked one investor who asked not to be identified.

Holland acknowledged the risks of investing in Asia’s frontier economies and recognised that those open to foreign investment can be subject to extreme early cycles. As a result, Cube has placed great emphasis on investing with established local partners that demonstrate a material and visible alignment of interest; using offshore investment structures with appropriate collateral, call-options and guarantees in place; and investing in nearly-completed and highly liquid projects. “Obviously, we’re looking to move investments down the risk curve,” he said.

Cube has waded into Asia’s frontier markets, with its early forays bearing enviable results. Now is the time to see who dares to follow.