Through our second fund, Aetos Capital Asia II, Aetos Capital Real Estate completed the acquisition of Simplex Investment Advisors in November 2007. Simplex was a publicly traded real estate ownership, development and fund management business which carried an aggregate value of more than $5 billion. As such, the transaction represented the largest privatization ever done in the real estate sector in Japan. Our fund was a 50:50 partner with a large institutional investor.
To us, Simplex had a very attractive array of businesses. In addition to owning a substantial Tokyo-focused real estate portfolio, it had a development pipeline and land bank, as well as a third-party asset management business that was mainly focused on Japanese retail investors. The in-place management was appropriate for its strategy.
It all worked, until the financial crisis when it didn’t.
When it didn’t work, our work really started. The company’s business model had to be restructured by shutting down developments, selling the land bank and focusing on operations. In addition, we began to build a third-party asset management business to provide services to foreign players rather than solely domestic investors.
Also, the company’s capital structure had to be totally changed. Originally we had intended to recapitalize the company immediately after acquisition, but given the deterioration in the financing market, it proved impossible. Subsequently, we sold assets to repay debt and allowed substantial portions of the company’s non-recourse debt to be foreclosed upon. But until the capital structure was fixed and the company was not viewed as being ‘distressed’, all other operational priorities were difficult to implement.
Nonetheless, by 2011, we had made changes that rendered the company an attractive, financeable entity once more. We then worked with the company’s lead bank on a $1.9 billion refinancing. The refinancing involved committing another ¥10 billion (then €85 million; $120 million) to the company and our original partner’s inability to do so enabled us to take over its interest in the company giving us 100 percent ownership. Having done that, we recruited a new management team, sold smaller non-core assets, and in 2013 completed a J-REIT IPO which enabled the company to sell $760 million of assets.
Once the company was put on solid operational and financial footing with a strong management team, it became a very attractive acquisition candidate. We began a sales process in early 2015 and received numerous offers from domestic Japanese investors, foreign funds, sovereign wealth funds, insurance companies and other real estate companies. Hulic, a domestic Japanese real estate company, was the successful bidder at a value of $1.3 billion, which represents a very reasonable return on our investment.
But, while outcome was solid, are there lessons to be learned from this experience? I think so. Firstly, invest in good quality real estate. We could have never gotten all these steps done without a good portfolio. Secondly, have strong management and excellent relationships with your lenders; third, keep financial flexibility in a fund to invest more money when needed; and fourth, do not panic when everyone else is panicking and maintain a consistent asset management and investment team to maximize the value of an investment over the long term.
Upon reflecting on our experience with Simplex, I will always consider acquiring large portfolios of assets or operating companies as a means of buying bulk at a discount, however, with little to no value being attributed to the ongoing operations of the company. Regardless, our main strategy in Japan will always be to acquire fundamentally mispriced assets due to either operational issues or financial distress, which offer the opportunity to add value through active asset management strategies. One of the key benefits of our extensive track record in Japan is that we can leverage our relationships, experience and asset management capabilities to generate attractive risk-adjusted returns.
Our experience with Simplex allows us to further capitalize on the credibility we have established in the Japan market for reliably and efficiently executing complicated transactions. There is tremendous liquidity from both domestic and international investors for stabilized assets in Japan – 13 assets held by Simplex were more than 95% leased. This liquidity should enable us to exit assets and portfolios to which we have added value on attractive terms.