SC Capital Partners is little over a decade old, yet its rapid ascent has catapulted the Singapore-based private equity real estate firm into becoming one of Asia’s most formidable and hard-to-ignore fund managers. Even harder to ignore is the firm’s charismatic founder and chairman and managing director Suchad Chiaranussati.
‘Suchad’ – possibly the only fund manager in Asian private real estate to be known by his first name – has led SC Capital Partners with bold, oftentimes unconventional direction. But judging by any performance metric, it has been a good run so far. The firm’s first three pan-Asia opportunity funds have generated an aggregate 27 percent IRR and that’s after taking into account taxes and currency fluctuations.
Real Estate Capital Asia Partners (RECAP) I, raised within the first year of the firm’s founding, closed on $221 million and exited at a 13.9 percent IRR and an equity multiple of 1.9x. The $190.3 million RECAP II launched in 2010 was fully liquidated by the end of 2014, generating a 30 percent IRR and a 1.9x equity multiple.
Over the years, the firm has also increased the size of subsequent funds in the series. RECAP III brought aboard $530 million and RECAP IV – the firm’s most ambitious fundraising to date – closed on $850 million after turning back almost $500 million from investors.
Despite his unconventional style, Chiaranussati credits this success both to good fortune and a disciplined investing strategy. In terms of the latter, the firm for instance prefers to keep greenfield developments to less than 20 percent of a fund’s investment portfolio to focus more on cash-flow generating assets. Also, the loan-to-value ratio of all investments is kept under 50 percent.
Explaining the rationale, he says it is easy to leverage transactions up to 70 percent to boost returns, but if the market becomes volatile, a small mistake could turn the deal into a loan restructuring rather than an investment.
“Investment is a risky business and the trick is to limit the downside and leave the upside wide open. If you look at history, the most successful real estate families and operators did not come about because of high leverage, but because they picked good assets and were countercyclical,” says Chiaranussati. “When other people were fearful they would invest and when others were exuberant they would step back.”
This was the vision with which Chiaranussati launched SC Capital Partners in 2004 following a six-year stint with Westbrook Real Estate Partners where he led the real estate investment management firm’s Asia operations. In his early 40s at the time, Chiaranussati saw the firm’s founding as the next chapter in his life.
An affinity towards the real estate industry gradually built up for Chiaranussati, who previously worked with JP Morgan in the proprietary investment and investment banking group and later also served as an advisor to the Central Bank of Thailand, helping the government agency in restructuring the country’s public and private sectors. In fact even today, he says he isn’t sure if leaving the hedge fund trading industry was the right decision.
What he hasn’t let go, though, are the investing principles learnt from his mentors at the time, be they his colleagues at JP Morgan or the then-governor of the Central Bank of Thailand. These principles he swears by even as he charts SC Capital’s journey.
“You may be able to read the market right but if your money management rule is not right, you will never make money,” he says. “You must not play with institutional money. This is someone’s pension, someone’s university grant, and if you are not sensible that will get affected. We shouldn’t be thinking outside the box just for the sake of taking risks.”
Balancing innovation and risk, however, can be a challenge, and more so for a firm known to put a creative spin on deals and a founder perceived by many people in the industry to be a non-conformist.
“I love it when people think we are creative, that we are taking out guns and shooting,” Chiaranussati responds with a smile, almost like an acknowledgement. “I know the perception I may have created is [I am] a bit of an outlier. However what we don’t talk about much is the amount of risk management that is done. Creativity is good but it should be followed up with good risk management and a strong corporate governance otherwise you will run into trouble sooner or later.”
Nonetheless, Chiaranussati sees safety where others see risk. Earlier this year, the firm invested around $33 million via RECAP IV to acquire a luxury resort in the Maldives at a yield of 6 percent. The 124-villa Reethi Beach Resort, located in a UNESCO Biosphere Reserve, was SC Capital’s first investment in the South Asian island nation.
The firm is also in the midst of navigating another innovative yet challenging deal to develop a hotel from a cruise liner in Myanmar (see box).
It is ironic then that one of Chiaranussati’s best deals so far is a plain vanilla transaction, one which did not require any “heavy lifting” at all, in his words. In 2009, the firm acquired a portfolio of residential properties in Singapore and ended up generating a 120 percent IRR when the portfolio was sold months later.
“A simple buy and sell with no repositioning, construction or value-add efforts, “he quips.
Buck the trend
All the deals done by the firm, innovative or not, are guided by a certain investment philosophy.
Chiaranussati says he usually chooses a sector for investment from a ten-year perspective since “what is not sexy today could become sexy three years later.”
He harks back to the global financial crises when the hospitality sector in Japan became the “armpit of the world”, a phrase Chiaranussati uses to describe the lack of willing investors. At the time, SC Capital decided to enter the sector and acquired a hotel property in Tokyo’s prime Nihombashi district for $30 million via RECAP II at a yield of 7.7 percent. The firm was able to get the deal financed at around 1.5 percent to 2 percent. Close to 11 months later, it exited the investment at a 60 percent IRR. Around the same time, it also took control of two hospitality real estate investment trusts (REITs) which it later merged into the Japan Hotel REIT, a listed trust that now has a market capitalization of $2 billion.
“Our decision came from two beliefs,” he explains. “We were able to buy the assets at a deeply discounted value. We also believed the Japanese government could have turned on the tap of tourism to stimulate the hospitality sector at that time. Luckily we eventually ended up being correct. Even if we were not, we still would have made opportunistic returns.”
Likewise for Australia at the moment, he believes the non-central business districts in Sydney are a better investment bet where cap rates of 9 percent to 10 percent can be achieved, as opposed to the core CBD area where low yields and high incentives are making deals expensive.
Chiaranussati prides himself and his investment team on spotting trends and efficiently executing deals in less-favored markets. However, he is as candid about his bad deals as he is open about the good ones.
Of the 30-plus transactions that SC Capital has done since inception, Chiaranussati says the firm has lost money on one. This was a Singapore condominium project acquired by the firm in 2011. Due to some housing market cooling measures implemented by the Singapore government following that purchase, including introducing an additional stamp duty, the firm reportedly ended up booking S$12 million (€7.5 million; $8.6 million) in losses when it sold the units to The Blackstone Group earlier this year.
Keen not to make any more mistakes, one trend he isn’t willing to latch onto however is outbound investing. At a time when cross-border capital flows are reaching record highs, Chiaranussati says he wants to remain within the Asia-Pacific region because his firm just doesn’t have the expertise to invest in other regions at the moment.
“When I set up the firm in 2004 the direction was clear: we would like to be a real estate asset manager with the best practices in APAC. We have decided not to go horizontally because there is hardly any edge we could have in the US or European markets,” he says.
What investors want
Whether it is venturing into offbeat regions or choosing a less favored sector, Chiaranussati does enjoy a fair bit of flexibility when it comes to investments. In a post-crises environment with cautious LPs which want a greater say in fund management decisions, it is less common to see a GP command such control.
One LP previously interviewed by PERE did admit that given Chiaranussati’s gravitas and his marketing strategy, one “perhaps could get carried away with his enthusiasm”. But he also added that given the strong performance so far that it was hard not to trust the man.
Another property broker is of the view that such flexibility in investments has only been possible because the firm has repeat investors in its funds with which Chiaranussati has built a strong relationship over the years.
The $221 million raised via RECAP I in 2004 was raised via two investors, with Chiaranussati also investing $1 million of his own capital. Both investors have stuck with the firm all these years, committing capital to both RECAP II and III. One invested in RECAP IV as well.
Nevertheless, investors’ resolve has been tested. When the firm was raising capital for RECAP IV last year, a decision was made not to have an officially documented hard cap for the vehicle, another unusual move for a fund manager and one that irked certain investors. The initial fundraising target was set at $750 million but the firm had as much as $1.3 billion in soft-circled commitments, leading some investors to fear overcrowding. Declining to implement a hard cap, Chiaranussati told investors to trust that he would close the vehicle at $850 million. True to his word, in December, the fund closed on $850 million with 25 investors aboard.
Chiaranussati is not perturbed that having his own way might annoy investors sometimes, “We had decided we won’t raise more than what we thought. A hard cap is just a set of numbers,” he says. “Our word is our bond. We don’t need to put that in writing. If you can’t trust our word, why give us money? We are all grown-ups. Whatever we said we would do, we will do it.”
At the same time, he agrees his business plan would have been very different if it weren’t for his loyal investors. “We have had great investors, sticky investors, who gave us the confidence. If the capital was short term and flaky, our business plan would be different,” he says.
Yet, for all his bold moves, Chiaranussati still doesn’t see himself as too much of a risk taker.
“Sellers think we are conservative and we don’t overpay. Other people think we are gung-ho. Somewhere in between, we have managed to create a sensible investment disciple with creativity and risk management.”
In his view, fund managers generally end up taking excessive risk to achieve higher returns. The risk could be in the fund structure, the amount of leverage or even having a partnership.
“People might decide to take on a GP partner to boost returns. And that introduces a lot of complications when you are making a decision to exit for example.”
There have been several instances when the firm too has altered its strategy after discussions with investors. A reason why the firm hasn’t ventured into co-investments and separate account deals for example, Chiaranussati says, is because of the difficulty in justifying the rationale to investors.
“Investors tell me, ‘we want to give you more equity but you don’t take it. After getting $1.4 billion, you closed [RECAP IV] on $850 million. Then why do you want to do a separate account?’”
Arguably, Chiaranussati’s biggest decision however was regarding the structure of SC Capital’s maiden core real estate fund in Asia. The firm’s initial plan, first revealed last year, was to launch the fund as a closed-ended vehicle, but it was eventually changed to an open-ended structure after taking into consideration potential investors’ preferences.
Chiaranussati says he had decided to structure the fund as closed-ended because of the orderly manner of exits. However, the flip was made to ensure the firm markets only one fund launch at any time. Given the firm already operates a successful opportunistic fund series, both the firm and investors felt the timings could clash if a core fund series was also launched.
Additionally, an open-ended fund would also ensure a long term alignment between the firm and its investors, and the firm would be able to generate strong returns through constant management and growth of cash flow, not relying only on cap rate compression
In trademark SC Capital style, this move had a creative element to it as well. The fund’s documentation has a one-year redemption notice, unlike the quarterly redemption notice period in Europe, a decision made to avoid any forced asset sales in a volatile market.
“A core-plus fund is similar to a perpetual holding except that it has a liquidity format. We have added the feature of a one-year redemption notice to make sure we don’t get redemptions in a month. Real estate should not be daily trading,” says Chiaranussati.
The firm officially began fundraising for the $400 million vehicle this summer and plans to hold a first close by the first quarter next year. Once this target is achieved by the end of next year and 95 percent of the fund’s equity has been invested, the firm plans to re-open the fund for more capital raising.
Chiaranussati says the firm had been mulling about plans to launch a low risk/return fund for some time, but his investors wanted to ensure a separate team is set up to manage the core fund.
In July last year, Gillian Chee was appointed as fund manager to steer the strategy. Before coming on board, Chee, who was previously senior vice president of fund management for Aviva Investors, was believed to been mentored by SC Capital’s managing director Freddy Chua for an entire year to prep for the role.
The hiring process for Chee wasn’t a one-off tactic.
Chiaranussati says before the company hires any person, no matter how junior, he has to meet all the partners, heads of department and assistants in the company. SC Capital’s core team consists of Ian Lein, managing director, who earlier co-founded Octagon Capital Partners and was also the Asia head of acquisitions and development for Starwood Hotels & Resorts Worldwide; Freddy Chua, managing director who previously served as chief executive officer of Stonegate China Properties and was also head of Hong Kong and China investments at GIC; and Andrew Heithersay, managing director, who was earlier an international director with LaSalle Investment Management.
In a staff of 34 people across six offices, rarely is any person hired through recruiters. Most appointments are through word of mouth. This, coupled with family-friendly work practices, according to Liwen Ho, the firm’s director of investor relations, is among the reasons why the company has a low very turnover rate in the industry.
Ho, who is in charge of investor relations, marketing and fundraising activities at SC Capital, has been working closely with Chiaranussati for more than two years. In her early days, she frequently travelled with Chiaranussati for capital raising and other initiatives. Having been part of the fundraising team in other firms before, she says he is much more laidback and less of a micromanager in contrast to most founders who are usually a “Type A” personality.
“Certainly not as intense like you would think,” she adds with a smile
Yet, a little over ten years in the running, Chiaranussati has already started working towards a succession plan and identifying younger executives in the company who could take on the mantle in a few years’ time.
“There are very few real estate businesses I would call successful today because the private equity real estate industry is still a relatively young industry. It didn’t really start until 1993,” he says. “My measure of success is if we are able to continue to do business in the long run. And that will happen when we are able to have a succession plan and ensure that our next generation is well-received by investors beyond my generation.”
While he agrees that there is a perception among other people that SC Capital is a one-man band and riding on his persona solely, he doesn’t believe it to be true. “The firm must not be around my personality. People identify me with the firm but they also need to give credit to all my other three partners.”
With a thriving REIT in Japan, a successful opportunistic fund series and now a foray into core investing, SC Capital has covered much ground since 2004.
For Chiaranussati, the real estate equation would be complete only after the firm enters the debt space and that is the next thing on his radar. In his view, real estate debt strategies are still in the elementary stage in Asia and the firm is on the lookout for a right team and investors to put its plan in motion. On the public side, the firm would also seek to sponsor another REIT elsewhere in Asia.
The remaining two parts of what he terms as his “four-pronged approach” include maintaining the performance of the opportunistic funds and keeping IRRs to a minimum of 18 percent at all times; and developing a portfolio of cash-flow generating assets for the core vehicle, via which he hopes to raise around $200 million by the first quarter of next year.
Close to $600 million is left to be deployed from the $850 million RECAP IV, meanwhile, following which the firm plans to come to market with a successor fund by the end of 2016.
Even after more than a decade of consistent performance, Chiaranussati is still adamantly reluctant to call SC Capital Partners successful.
Personally too, while he might be preparing a succession plan for the firm and spending his personal time mentoring young real estate professionals, he is not ready to hang up his boots just yet.
“A firm should not be judged until it reaches 20 years,” he says. “What I set to build out ten years ago, I am only halfway done. We are not successful yet. This is just the beginning.”