ASIAVIEW: Credit where credit’s due

There’s a feeling at Secured Capital’s Tokyo headquarters that the firm has benefitted from a perfect storm of positive factors leading to last month’s final closing for its latest opportunity fund. 

The real estate arm of investment manager PAG surprised many when it announced it had closed on $1.5 billion in equity for its Secured Capital Real Estate Partners (SCREP) V fund, 50 percent more equity than the $1 billion it originally targeted and some 15 percent more than its original hard cap. PERE understands that Secured Capital shifted the hard cap to accommodate a late surge in demand from large institutions and could have added considerably more equity still.

Speak to senior executives at Secured Capital and you’ll hear how an improving economy under Prime Minister Shinzo Abe has come just as institutional investors seek dedicated exposure to the country’s private real estate market. Meanwhile, there are few managers for such investors to back if they want to do so.

There is certainly truth to those assertions. GDP growth slowed in Japan in the third quarter to 0.5 percent following second quarter growth of 0.9 percent, but that still was a fourth consecutive quarter of growth – the country’s best run in three years. With inflation on track to meeting the Bank of Japan’s 2 percent target, positive economic sentiment abounds. That the bank opted not to increase its ¥60 trillion per year bond purchasing program adds further credence to predictions of positive economic climes to come.

Meanwhile, Fortress Investment Group – Secured Capital’s closest rival – is not yet halfway through the ¥130 billion ($1.27 billion; €944 million) it raised for its second opportunity fund this time last year and it will be a while before the New York-based firm is open for another round of commitments. As a consequence, investors have only Aetos Capital’s fifth fund as an alternative if they want to engage with a Japanese opportunistic property strategy, aside from a sprinkling of smaller, sector-specific vehicles. Even then, the timing overlap between Secured Capital’s and Aetos Capital’s fundraisings has been little more than one month, giving investors limited opportunity to conduct a fair comparison of the two offerings. No doubt, the senior executives at Aetos Capital, which is seeking $1 billion for its fund, will be rubbing their hands at the prospect of today being the only firm raising capital for a Japan-dominant opportunistic property investment strategy.

Japan’s economy may well improve and Secured Capital’s competition might be limited, but let’s not do Secured Capital a disservice. This is a results business after all, and few firms without a solid track record have been rewarded with repeat commitments. SCREP IV, Secured Capital’s $525 million fourth opportunistic fund, is understood to be generating net IRRs north of 20 percent. For a fund with an investment period that was severely interrupted – first by the collapse of Lehman Brothers in 2009 and then the Tohoku earthquake and tsunami in 2011 – that is unquestionably good going.

Secured Capital is barely tweaking its investment strategy from Fund IV to Fund V. It is staying faithful to a thesis that depicts a wide enough distressed real estate and debt landscape from which to pick up deals. That’s no bad thing either. While Fund IV benefitted from a broad crash in property prices since 2008, this latest effort can pick off those sellers now exposed by the lifting of the government’s three-year moratorium on loan foreclosures – a protective measure designed to keep loss-making real estate off bank books – that ended in March. Despite some improvement in values, that has placed many loans into technical default, and today these loans are being bundled up and placed for sale by Japanese banks keen to improve their core capital positions and take advantage of a more liquid marketplace.

That type of debt, coupled with loans on sale as part of the continued deleveraging efforts by various foreign banks in Japan, infers a pretty fertile investment landscape for a firm that can boast decent relationships on the ground and a deep bench of loan servicers with which to process the debt it picks up. Of course, the proof of the pudding is in the eating.

To that end, Secured Capital’s investors, particularly the early closers, have seen the firm put approximately 20 percent of the capital of SCREP V to work already through 11 deals. And it already has round-tripped three investments, far exceeding its targeted return on approximately $75 million of equity, PERE has heard.

Tellingly, Secured Capital has chosen to reinvest the capital rather than return it. For its investors, that is as solid an indicator that the firm’s strategy still has legs as any confluence of macroeconomic predictions and assessments of the competition.