When Timothy Walsh described the current private equity real estate market in Asia to the Wall Street Journal last month as “just a few niche guys,” he was perhaps a little harsh. “There’s not a whole lot of competition out there,” the director of the State of New Jersey Division of Investment told the newspaper.
Proven Asian firms like Arch Capital Management, SC Capital Management and ARA Asset Management or the Asia platforms of global firms like Invesco Real Estate, LaSalle Investment Management or Pramerica Real Estate Investors might well feel aggrieved at such talk. Still, Walsh has a point.
At the end of March, New Jersey committed the first $500 million to the private equity real estate juggernaut du jour, The Blackstone Group, for its first Asia opportunity fund. Rightly, the $70 billion pension described how limited its options were given the scale of its investment. Indeed, not since Merrill Lynch hauled in $2.65 billion for its Merrill Lynch Asia Real Estate Opportunity Fund in 2008 has a pan-Asia real estate opportunity fund raised anywhere near the capital that Blackstone is attempting.
New Jersey’s cheque for Blackstone Real Estate Partners (BREP) Asia was the largest commitment the pension plan has ever made to a real estate fund. Tellingly, it also amounts to the largest capital-raise for any Asia real estate opportunity fund in 2013 so far and is a greater sum than all but three funds managed throughout last year.
Blackstone is targeting $3.5 billion for its fund, although that amount could swell to $4 billion if its hard cap is reached. Success would make BREP Asia the largest real estate opportunity fund ever raised for the region, surpassing MGPA’s $3.9 billion third fund, MGPA Asia Fund III, by $100 million.
Walsh said he believed Blackstone to be the largest and best established investment manager, with the widest geographic presence among its competitors. Endorsement indeed for a firm actually a first-time manager in the region – even if it has raised some $32 billion for opportunity funds globally since it started investing in property in the early 1990s.
More than extol the virtues of Blackstone, New Jersey’s commitment to the firm and Walsh’s words don’t exactly compliment the region’s longer-established heavyhitters like MGPA (240 staff, seven offices), LaSalle Investment Management (200 staff, eight offices) and others.
Once MGPA’s corporate future is resolved – the firm was the subject of a sale at press time – it is expected to bring MGPA Asia Fund IV to market with a target of about $1 billion. LaSalle handed back $600 million from its $3 billion LaSalle Asia Opportunity Fund III in late 2011 in a bid to curry favor with investors for its fourth effort, for which it is targeting up to $750 million. Although New Jersey was an investor in LaSalle’s third Asia fund, Blackstone’s offer evidently was more compelling than LaSalle’s this time around.
Unless an institutional investor wants to ‘be the fund’ – and some do on a country-specific basis –it does have limited options through which to put large capital to work. The latest commingled funds of Asia’s ‘niche players’ – Arch, SC Capital and ARA – each closed at around the $500 million mark, which is the same amount New Jersey has committed to Blackstone.
Frustrating for its competition, Blackstone does look likely to prove it is the next big thing. During the firm’s first quarter earnings call last month, its president Hamilton ‘Tony’ James predicted a first closing in the second quarter that would exceed $1 billion. That amount already would equal the overall target of MGPA’s fourth fund, and no other pan-Asia funds are even asking for as much.
Nonetheless, Blackstone is paying its dues to assume the mantle as the manager of the region’s biggest real estate opportunity fund. Limited partners in BREP Asia typically must pay a 1.5 percent annual asset management fee, but that fee is reduced to 1.25 percent for investors committing $200 million or more. New Jersey, however, has negotiated a fee of approximately 76 basis points on committed capital during the investment period, based on a fee waiver for the first eight months of the fund’s life, and a 1 percent fee thereafter. In addition, Blackstone will be subject to a reduced catch-up rate of 65 percent, as opposed to the standard 80 percent, over the 8 percent preferred return.
These terms are understood to be among the most favorable Blackstone has ever offered. Regardless, that’s a small price to pay for establishing itself in Asia at a time when the region’s heaviest hitters are scrambling around to raise a fraction of what they managed before.