BLUEPRINT: Time on his side

It is the week leading up to Chinese New Year and the eastern extension of Hong Kong's central business district, Admiralty, is bustling. Last minute business can be seen before the island shuts down to celebrate the Year of the Monkey.

Among the energetic executives trying to tie up some eleventh hour business is John Pattar, managing director at CLSA Capital Partners and head of the firm's real estate fund series – known as Fudo Capital.

Although, work is not put on hold over the holidays for Pattar. In fact, he'll spend the festive period jetting between Malaysia and Japan visiting investors and eyeing up properties.

Pattar's Fudo Capital funds focus on value-added and opportunistic investments across Asia-Pacific. The strategy involves re-positioning, re-development, re-leasing, and the refurbishment of assets. Investment sizes typically range from between $25 million and $150 million in equity with asset sizes under consideration ranging from $50 million to $300 million.

Despite the pre-holiday frenzy Pattar is able to make some time for PERE at his headquarters within the staggering 48-story Lippo Centre Tower II. He is not used to holding court among journalists, admitting the interview is his first ever. This is somewhat surprising. It is not easy to avoid the glare of modern media when you have sourced and completed around $4.4 billion in property deals in Asia. Even less so when you have done so under the flag of CLSA, one of Asia's leading independent brokerage and investment groups (coincidentally founded by two former journalists, Jim Walker and Gary Coull, in 1986).

Besides, newspapers have been kind to Pattar in the past. He owes his start in Asia real estate 25 years ago to The Sunday Times . “I saw adverts for local agencies in the paper while I was in the UK. Applied for the job with Chestertons [in Hong Kong], and one for Colliers to go to Tokyo. I went for the interviews in a London hotel and both offered me the jobs.”

He took the job with property management and consulting services firm Chesterton Petty (which has since been merged with Knight Frank in Hong Kong), but from the outside the move would have appeared counterintuitive. At the time, a large number of expats were fleeing Hong Kong after the Tiananmen Square protests in 1989. Fears centered on whether China would renege on its commitments to the one country, two systems agreement following the impending handover from the UK to China. In any case, Pattar's initial stay in Hong Kong only lasted a year as he moved between jobs early on in his career.

“I was head hunted to go and join CBRE, as they wanted me to head up investment and also residential in Thailand. I was keen to get as much experience as possible in Asia at that time but, I always wanted to work in funds management. In an agency I didn't have a broad enough exposure so I was then lucky enough to get head hunted to join First Pacific Land.”

Pattar calls his time at the Hong Kong-based investment manager “fabulous” and says it was his first exposure to the underpricing of assets in Asia. “The reason is First Pacific Land in South East Asia had assets in Bangkok as well as Vietnam, and what we were primarily doing was turning round buildings that required a change of use. I could get a feel that there were quite a few opportunities.”

Crisis time

It was Pattar's next role that cemented his focus to real estate investment management. The timing was key. “They say that one of the best attributes I have got is timing. That's been true for most things in my life.”

“I got a job offer to join Lend Lease in 1996 to head up South East Asia and become their acquisition person, particularly covering Thailand, Vietnam and Indonesia. The Asian financial crisis hit around six months after I started, it couldn't have been better from a timing perspective because we were actively looking at assets.”

But, after a short time at the Australian developer-cum-fund manager his focus shifted. Again, timing played a part in him becoming chief investment officer of Lend Lease Real Estate Investments (Asia).

“I saw the Asian financial crisis opening up North Asia, so when I was invited to an 'up and coming' manager's retreat in Hawaii for the next generation of Lend Lease executives I put together a presentation explaining the opportunity.” 

“I presented why I thought they [Lend Lease] should be focused on Japan, Korea and North Asia. The plan said they should be looking at these markets where the bigger opportunities were. My boss at the time jokingly said we've just hired you to do South East Asia and you are talking yourself out of a job.”

A package was put together for Pattar there and then. The very next week he moved back to Hong Kong. “This was Lend Lease at its best, when they were really proactive and get up and go. They gave me one person to work with and a secretary and said go make a business work.” 

Business time

The Lend Lease Asia platform grew rapidly under Pattar and during his seven year stint at the firm he grew the assets under management to more than $1 billion. But, by 2003, the US investment management business of Lend Lease had run into huge problems. This had a knock-on effect for Lend Lease in Europe and also in Asia. 

It soon became very clear to Pattar that the Europe and Asia businesses would either be folding in on themselves or sold. “I worked not dedicated to a fund, but a platform. Lend Lease's structure was that I was sourcing product for a global opportunity fund, a local retail fund and they were also trying to set up two REITs. All of that worked stopped when they were trying to sell the business in America,” he laments.

Out of Lend Lease emerged two fund management platforms. MGPA, which was formed in early 2004 by Jim Quille who led a management buyout of Lend Lease's Global Property Investment Fund unit backed by Australian bank Macquarie. Quille is now senior advisor at BlackRock Real Estate following the asset management giant's takeover of his Asia and Europe-focused private equity real estate business in 2013.

“I was asked by Jim to join him. I did look hard at that but felt that in 2004 this was a good time to set up something new,” says Pattar.

Serendipity played another part in Pattar's next venture. At the time CLSA was a securities business that was branching into alternatives. The firm knew Pattar as its research division was his preferred house for property data while at Lend Lease.

“They said they were moving into alternatives and would Lend Lease consider selling the Asia business, and I said it's just a platform, it doesn't have assets under management. So they said do I want to come over and set one up organically. I said yes and bought over a very good friend and colleague who had worked with me for several years, Thomas Tan, and we said let's start again.” 

To get off the ground CLSA put $50 million into the first real estate fund, Fudo Capital I, and some US investors who would back CLSA also put some capital in. Pattar was then charged with raising $250 million. “We hit the market at just the right time and managed to raise $430 million in 2005.” 

The strategy was to deploy capital in value-added investments across Asia-Pacific. IRRs of approximately 20 percent were targeted from investments made via the first fund. The firm made investments in Singapore, Japan and Taiwan and when quizzed about some of his favorite deals, Pattar harks back to properties acquired for Fund I.

Fund I led straight into Fund II and once more timing was key. “Our biggest single claim to fame would be that we decided to put a sale order on everything in 2006, just before the crisis. I can take no credit for knowing there would be a crash but we just thought that cap rates had gone to levels which were unsustainable.”

“We just felt that if you were a value-added fund, and this goes to the heart of my philosophy, once you have done your value add and you believe you have got the return you are expecting you should take the opportunity to exit.”

“Exits, exits, exits. It's what we really are about at this house, we really feel our primary objective is to always look at very liquid markets. Our call in 2006 was that liquidity can dry up very quickly in any real estate market, let's take the opportunity to sell what we can.”

Just in time

The two funds morphed into one as Pattar asked investors to roll their capital over into a new fund after the quick fire sell-off of Fund I assets. After achieving gross realized IRRs of 80 percent and an equity multiple of about 2x for realized investments for the platform's first fund, Pattar and his team corralled enough confidence from their investor pool of North American and European investors to fend off the widespread investor attrition that was starting to ravage the fundraising market.

In fact, Pattar's firm was able to hold a $500 million first closing on the same day that Lehman Brothers bank collapsed.

Recalling that fateful night in September 2008, Patter says: “It was a massive vote of confidence as people were well aware of the warning lights.”

“I remember lawyers contacting me saying you realize the world is coming to an end and my boss is telling me I have to sign off a subscription document.”

But, the tactic was not to jump into the deep end with the returned capital. Rather, create a war chest for when the time was right to invest.

“We said look, we realize there is too much turmoil and that sometimes the volatility gets to such a level that buying anything is probably a little too risky. But, we want to be armed and ready for when the time comes to buy. So the call was saying we need your backing and subscription off the back of Fund I's success, we won't call the capital while the capital markets and debt markets are in such turmoil. But, we will be looking at assets fairly swiftly early on in the cycle.”

From that Lehman-defying start, the Fudo II fund closed oversubscribed on $816 million in November 2009, having garnered commitments from more than 20 investors.

Pattar's latest fund, Fudo Capital III, was also a success. Although, he readily admits that it was nowhere near as easy third time around – even with an impressive track record. 

“We combine the funds of Fund I and Fund II for track record, so we are talking about 32 percent gross return. We pair them because they are the same investors and we rolled over a lot of the capital.”

According to Pattar, the main reason for Fund III being more difficult to raise was that many US institutions had reached their global real estate allocations by the time CLSA hit the road, and that a lot of them were now re-trenching.

“It was difficult as Asia had gone out of vogue with US institutions so we were surprised at how difficult it was to raise capital during this period. We had quite a few of our original investors say they were just not going in to Asia funds anymore.”

“The re-ups were more difficult. Some of the investors dropped out from the US so we had to replace them. The re-ups were closer to 45 percent for Fund III.”

Funds I and II were filled with predominantly US-based capital, whereas it is a more even split among the regions for Fund III and the firm was able to collect 35 percent of its capital from Asia.

“In Funds I and II, other than CLSA house money, we had none from Asia. So we now have Asian money for Asia. Fund III moved from being just state and corporate pension funds. Once you get to a billion dollars you suddenly become acceptable to a lot of sovereign wealth funds.”

By June 2015, the firm wrapped up fundraising for Fudo Capital III at its hard cap of $1 billion, exceeding the initial fundraising target of $850 million. 

“The roadshow was easier. We spent less time on the road, but a lot more time on the due diligence details. It was quite an interesting change because the roadshow interest was high and we ticked a lot of the boxes for investors, like the team being together for eight or nine years, the track record, stability in the platform, but the due diligence the LPs were doing had stepped up considerably post-GFC.”

Fudo five

The key difference this time round was greater scrutiny on the wider CLSA team, says Pattar. Despite there being just two key men identified in the documentation of the first two Fudo funds, there was a further trigger clause demanded by certain larger limited partners. It stipulated that, should Pattar leave, their commitments would be jeopardized.

“The hot buttons for us were first of all about the depth of my team, they particularly wanted to make sure that I had some sort of succession planning,” says Pattar.

“We were aware of the key man aspect because when you move from $430 million to $816 million you have to. The saddest thing was that my natural heir apparent and successor, Thomas Tan, unfortunately died of cancer. He had worked with me for seven years at Lend Lease and helped me set up here at CLSA. I spent more time with him than I did at home. It was very sudden, and a shock to the system.”

“We all decided that we needed to broaden out who else participates. During the course of Fund II, I was mapping out who I thought in the team was vitally important to us moving forward. We anticipated this could come up given that Thomas had passed away just as we had finished and were raising Fund III.”

So, while Pattar's key man clause still exists, there is more of a shared burden. Following pressure from investors to have CLSA's broader team assume greater responsibility, five extra key staff have been identified. The group now includes Pattar, chief financial officer Yeu Liong Chong, head of portfolio management Angel Li, regional head of asset management Paul Gately, head of Japan Hirotaka Uchiyama and head of China and Taiwan Byron Zhao.

As a result the key person clause is now two tiered. At the top level is Pattar leaving, while the second tier needs multiple departures for a key man event to be triggered and investor commitments to become jeopardized. CLSA's investors already are becoming better acquainted with its five key staff as each played a role in the firm's capital-raising campaign.

One of Fudo Capital III's investors agrees that extending the key man clause was essential in getting investor buy-in, and that his team did a much deeper dive into the skillsets of these executives. “We did much more personal due diligence on those guys. Although John is in charge it's important for any investor to understand the strengths and the weaknesses of a firm as a whole.”

The investor adds that he wanted to see CLSA move towards receiving whole fund carry, rather than deal-by-deal. To this point Pattar accepts that is where the market is, but adds his firm has always won favor with investors by spreading the carry throughout the team.

“A significant portion of the carry goes to the management team, up to 75 percent, so that answers a lot of question on alignment. We give carry to over 16 people out of 25 so that's really unusual. I spread the carry right out through the team and that has been a really important retention tool,” says Pattar.

Time for expansion

A large swathe of Fund III's capital has already been deployed into five deals in the office, retail and logistic sectors in Hong Kong, Nagoya, Shanghai and Tokyo. However, Pattar says it's not easy at the moment to generate the 20-plus percent returns his firm craves.

“The markets and cap rates have compressed so it is difficult to get opportunistic returns without a value-add component to your team, you have to be prepared to roll your sleeves up.”

Pattar says that, apart from timing, asset management skills are an integral part of the firm's DNA. “We get involved on every single lease, we have done leases in ten years. We are heavily hands on.”

And due to the asset management skill set at CLSA, Pattar, sees the firm expanding into the core-plus sector in the near future.

“Core-plus is an area we would definitely look at. The reason is, I think we dismiss a lot of assets from the opportunity space because they don't hit our return requirements. But, the pipeline seems very strong in that sector. Sometime over the next 12 months it is something we will look at, definitely. Deal pipelines drive that, and it doesn't interfere with what you are doing in the opportunistic space. For us the opportunity fund space is very much about finding 20-plus returns and I think the core-plus is closer to 10 to 11 percent so they don't cross over much.”

“I'm skeptical on core because unless you create core I haven't seen the largest landlords, with the exception of Australia, trade Grade A assets often. We saw a few during the Asian financial crisis in 1998 in Seoul and Japan in particular, but that didn't spread down to Hong Kong or Singapore. Buying core that is giving you 5 percent yields is very difficult unless you build it, but that is a different story.”

Given Pattar's reputation of timing markets the private real estate industry will watch closely for when CLSA does venture into the core-plus space. Pattar's CLSA was born in 2004, the Year of the Monkey. When the year of your birth sign rolls round the Chinese believe you will suffer bad luck. But, after an hour in the company of the man, something tells us he will not be paying much attention to such