SC Capital Partners, the pan-Asia focused private equity real estate firm, has never been concerned about convention when investing. A $25 million commitment last month to a hotel development in Yangon from its latest Real Estate Capital Asia Partners (RECAP) opportunity fund will be among the first international investments made in Myanmar since a civilian government replaced a military junta in 2011. The firm’s convention-busting antics do not stop there.
In addition to revealing its investment in Myanmar, PERE also reported last month on SC Capital’s plans for its first pan-Asia core real estate fund. In itself, that is not particularly controversial: core real estate investment funds for Asia are steadily becoming an accepted part of the private institutional investment landscape in the region (see this month’s Asia roundtable, beginning on page 40). However, SC Capital’s fund will be structured as a closed-ended vehicle, and that represents something of a departure from the norm.
IPD, the property research firm, tracks 25 core real estate funds in Asia, of which none are structured as closed-ended vehicles. And that chimes with PERE’s coverage of the nascent market segment. M&G Investment, SEB Investment, Invesco Real Estate and Pramerica Real Estate Investors are examples of real estate investment managers with core real estate strategies in Asia, but each is operating an evergreen structure. PERE also has learned that one of the world’s biggest investment banks is plotting its first Asia-focused core real estate fund. That too is slated to be structured as open-ended.
Nevertheless, Suchad Chiaranussati, the former Westbrook Partners executive who founded SC Capital in 2004, believes open-ended real estate funds are counterintuitive in nature. By his reckoning, the fault ironically lies in one of the more popular reasons that institutions have for investing in evergreen structures in the first place: the benefit of liquidity. “We believe that one tends to actually need liquidity only when markets turn illiquid,” he said. “That means the open-ended feature may not work well when it is needed the most.”
For Chiaranussati, a real estate investment manager is most effective selling assets when they are trading “above normal or reasonable value” and not when its investors require liquidity. For him, investors seeking indefinite exposure to real estate should instead engage via REITs or other publically-traded real estate companies. “They offer better liquidity than open-ended funds anyway,” he added.
Indeed, while shares in publically-listed real estate companies are valued in real time, the value of units in private open-ended real estate funds oftentimes are valued on a monthly basis. In Asia, they generally are valued at even wider intervals, sometimes bi-annually. Furthermore, as is the case for an open-ended real estate fund currently being raised by Invesco, redemption requests oftentimes may only be submitted at quarter-end and only after a pre-determined number of years, meaning such vehicles are still relatively illiquid when compared to their listed counterparts.
Nonetheless, private open-ended real estate funds are gaining in popularity among international institutional investors –and not just for fresh investment programs. In certain instances, investors keen not to relinquish their exposure to core assets in the region have persuaded their managers to adapt the holding structure to accommodate longer-term ownership. Pramerica Real Estate in 2011 and Red Fort Capital this year are two such managers prompted by their investors to transfer assets from closed-ended opportunistic real estate funds to open-ended core funds in an effort to retain exposure to now institutional-grade property – leased and income-producing.
The genesis behind SC Capital’s core strategy, however, is understood to have come from a different mindset entirely. It was derived from the firm previously having to pass up opportunities to acquire real estate in Asia’s gateway cities that were compelling from a risk-return perspective but fell outside the return requirement of the firm’s opportunity fund series.
Chiaranussati would not discuss his firm’s capital-raising endeavors, but PERE learned how SC Capital hopes to raise $400 million for the vehicle. Meanwhile, investors in the vehicle should expect a real return on capital of between 6 percent and 8 percent per year and an IRR of 12 percent.
SC Capital is happy to swim against the tide when it comes to investing, and its investors so far have been rewarded for their trust in its judgment. In October, the firm revealed it has generated IRRs averaging 29 percent on behalf of more than $1 billion in institutional equity commitments across its three RECAP opportunity funds to date, demonstrative of such investor support. Whether that support continues for its unconventional core fund will become clearer once SC Capital holds a final closing.