On the morning of March 23, over 300 shareholders of Singapore-listed ARA Asset Management gathered to decide the firm’s future, filling the convention center in the palm-shaped Suntec City, ARA’s sprawling three million-square-foot multi-use development.
Addressing them was co-founder and group chief executive John Lim, who explained why the buyout bid of S$1.78 ($1.31; €1.1) a share, offered by a consortium comprising private equity firm Warburg Pincus and Chinese investment and trust manager AVIC Trust, was fair value. When he asked everyone in the room if they had ever lost money on ARA shares, no one replied.
A few hours later, 81.16 percent of the shareholders present voted in favor of the buyout, with one long-term investor going so far in his appreciation as to call Lim the “Warren Buffett of Singapore.” High praise indeed, but then Lim does feature on Forbes’ 50 richest Singaporeans list. At the city-state’s national day celebrations last month, he was also awarded a public service medal for his corporate social responsibility efforts.
But, like Buffett, Lim’s own take on his entrepreneurial journey comes with a steady dose of humility and self-deprecating humor. For him, his partnership with the influential Asia tycoon Li Ka-Shing – his firm Cheung Kong Property Holdings invested $300,000 alongside Lim’s personal commitment of $700,000 to set up ARA in 2002 – is a dream come true. He counts himself lucky the deadly SARS outbreak that ravaged Hong Kong soon after ARA’s launch ended quickly, or else there would not have been a “John Lim success story.” These days, with Warburg Pincus’s backing in tow, he says networking has become easier; he no longer has to fly everywhere, knocking on executives’ doors to introduce himself.
But when it comes to talking about ARA, an air of assuredness takes over. He says anyone who invested in the firm over the last 10 years would have made returns of about 15 percent per annum.
Further, with the privatization process fully completed, Lim is embarking on an ambitious journey to better that performance by making ARA not just a household name in Asia, but a global real estate fund manager. Lofty expansion goals include increasing the assets under management from S$35.6 billion currently to S$80 billion-S$100 billion in just five years. Expansions into new markets like Japan are underway, and Europe too is in the cards. Plus, he is even venturing from real estate to investing in cousin asset class, infrastructure. To that end, a $1 billion infrastructure fund is being plotted.
In keeping, Lim says the decision to privatize his firm had nothing to do with ego. “Do I have a big plan? No. I only have this AUM number that I want to achieve, and I am going to take one step at a time,” he says. “As a businessman, I have no downside to taking ARA private. I can come back and list again if I think this wasn’t right. The market will give us the same valuation.”
A reprivatization was not always part of the plan for ARA, which went public in 2007. Every few months, suitors interested in buying the company would show up at Lim’s office, and he would tell them the firm is not for sale.
Then, in late 2015, ARA raised S$152.1 million from a rights issue, a process Lim describes as a long and painful experience. Referencing that time when discussing today’s plan, he says: “We need about S$2 to S$3 billion of capital to grow the business in the next three to five years. But if we are going to tap the market at S$150 million per annum, we will need 10 years to do so,” he says, describing his thinking at the time. “I wasn’t sure if I would still have my passion and energy when I am over 70.”
He unflinchingly admits that trading at a discount to market value was making it hard for the firm to raise the kind of capital it needed to expand. “ARA traded at a S$1.2 billion market capitalization for a long time, 40 percent below my peers in Japan, China, Australia and elsewhere. After my song and dance around the region, and doing roadshows, it went to S$1.4 billion, and stayed there. So, when the Warburg offer came to us, valuing the company at S$1.8 billion, we took it because it was the right valuation offered by the US company relative to what it sees my type of a firm trading at globally.”
Ultimately, it was all about the cost of capital. “Today, private equity money is so cheap, so one can take it to grow the business and make returns. But the day public money is cheaper, people will rush for that,” he says.
With Warburg Pincus, ARA wants to leverage the private equity firm’s global network of investor relationships and its mergers and acquisitions capability. Meanwhile, AVIC Trust would particularly help the firm tap Chinese capital markets. China is one of ARA’s key investment markets, comprising 28 percent of its total AUM across its REITs and private funds, as of December 31, 2016.
Ellen Ng, Hong Kong-based managing director at Warburg Pincus, agrees her firm arrived at the right stage of growth at ARA. The New York-based firm had also in fact pitched a pre-IPO investment to Lim 10 years ago before ARA went public, but he declined the offer.
“We think a local player like ARA would be better positioned to take advantage of the growth in Asia. We like the infrastructure it has set up over the years and its foothold in multiple geographies from North Asia to Australia,” she says.
And having an entrepreneur like Lim at the helm, who still has many “fans among his public shareholders” in her words, makes the firm more appealing. “John came from a very institutionalized training background. He has built ARA with that mindset. Now, compare that with a lot of the Chinese companies we back, led by a superman-kind of ‘I can do it all’ entrepreneur. John is a hybrid product, [in that] he has a very thorough underwriting process, and is still almost a patriarch-type entrepreneur at the top.”
Priyaranjan Kumar, regional executive director for Asia Pacific capital markets at Cushman & Wakefield, says Lim is also a deep optimist: “A skeptic cannot achieve what he has, which is all about taking long bets and seeing the world 10 years ahead in terms of demand, the makeup of capital and asset pricing.”
Industry observers say ARA’s ambitions are anchored to evolving trends in the private real estate industry.
“Where John is at in his career, it would have been easy to just keep ARA a listed company and ride off into the sunset,” says Jeffrey Perlman, managing director and head of South-East Asia, at Warburg Pincus. “But this move is about him assessing the potential market opportunity and seeing the large institutional capital flows getting redirected to Asia (given how underallocated most investors are to the region) and deciding that the corresponding risk/reward was definitely worth the new challenge.”
Lim also wants to take advantage of the growing wealth building up in Asia by becoming a conduit for this capital to invest globally. The scale of this wealth is apparent when one compares ARA’s two major investment partners. The California Public Employees’ Retirement System, for instance, has invested $800 million with ARA over the course of several deals in China. By contrast, as one industry observer points out, China Life Insurance invested close to $2 billion in just one deal – Shanghai’s Century Link.
In Lim's view, the more unstable the geopolitical situation in the north of Asia, the more Korean, Japanese and Chinese money is going to the south, and to western markets. ARA has operations in Australia to tap the tide of capital inflows, but not in the US and Europe. “I think this is a good opportunity to start looking at Europe,” he says.
Geographical expansion is one of ARA’s key targets. Sectorally, the firm had invested only in office, residential and retail, before its foray into infrastructure with the launch of a fund to invest along the One Belt, One Road countries.
Like any firm, ARA also wants to continue expanding its investor network, which remains one of its main strengths. Beng Tiong Ng, assistant group chief executive and chief executive for the private funds division, says the fact investors have repeatedly invested with ARA across club funds, separate accounts and blind-pool funds demonstrates the relationship.
One such long-term partner is CalPERS, which counts ARA as its only partner in China for core and core-plus investments. Through the ARA China Investment Partners separate account, the $800 million the investor has deployed so far is generating low-teen returns currently. In recent years, ARA has been investing through separate accounts and club funds. It has not raised a blind-pool commingled vehicle since the $441 million closing of ARA Asia Dragon Fund II in 2011, which is now fully deployed. According to a spokesperson for the Teacher Retirement System of Texas, which invested $200 million in the vehicle, it was generating IRRs of 8.75 percent as of March. Meanwhile, the $1.13 billion predecessor fund ARA Asia Dragon, in which the US public pension committed $150 million, was yielding 7.01 percent returns since 2007.
That is not exactly opportunistic fund performance. Nevertheless, Ng doesn’t rule out the possibility of an ADF III coming to market in the future.
Too much risk?
With private equity firms as backers, ARA now has access to patient, long-term capital for its growth plans. But does this require a change in its investment style?
“With ARA, it has always been about calculated risk,” says Sachin Doshi, the former head of Asia-Pacific real estate at APG Asset Management. “Lim is very quick at making decisions, because he has a very clear view of what he doesn’t want.”
Describing boardroom conversations as stimulating, Warburg’s Ng says they constantly discuss how ARA can pursue higher-risk products.
“ARA has been focusing on core, core-plus, and value-add opportunities in the high single digit to mid-teens IRR spectrum. If you compare that with Warburg Pincus, our mandate is to pursue opportunistic, entity-level type investments with multiple times growth,” she explains. “Why are we focusing on CBD in China for example? Or, could we be more actively thinking about mezzanine debt opportunities? These are types of things that ARA has thought through, but they had been more constrained as a public vehicle.”
Some other onlookers say chasing AUM also carries a different type of risk of growing too fast, too soon. Lim disagrees. In his view, there is no risk as long as the firm does not expand aggressively at the expense of its investors. For him, a bigger concern is reputational risk. That is one reason why the firm has maintained an asset-light strategy since the beginning. Lim says many fund management platforms buy land, build assets and then sell them back to their own REIT.
“Some people tell me you are making so little money – only about S$100 million for a S$35 billion AUM firm,” he says. “But I will never deploy balance sheet capital. During good times, these managers might make three times more, but bad times they go belly-up very fast.”
Nevertheless, Lim insists his senior executives have ‘skin in the game.’ They each have to co-invest with any fund they raise.
Aside from serving investors, exit plans for the incoming stakeholders have also been a major consideration.
For Warburg, which invested in ARA via its $13.4 billion global private equity fund (50 percent) and its $2 billion China companion fund (50 percent), the ideal investment period is five to seven years.
“We see massive tailwinds in this investment. We are embarking to triple or quadruple the AUM to S$80 to 100 billion in the next five years, which would make ARA the largest asset manager in Asia and top ten globally. Ultimately, it could be a strategic target for a global powerhouse, or attractive as a standalone listing target, either in China or Singapore,” Ng says, when asked about how Warburg is planning its exit.
When Lim is asked the same question about Warburg’s divestment, he quips instantly: “What about my exit? I am a private individual and need an exit, too.” He starts talking about the one question several onlookers, including Doshi, are eager to ask him: When will 61-year-old Lim say, ‘This is it?’ And Lim doesn’t conceal his dilemma about chasing that elusive work-life balance.
“Most entrepreneurs reach a point when they become complacent. I have also been struggling for the past two to three years about, ‘do I want to continue to travel like crazy, or play with my grandchildren?’ If I stop today, I have enough money for five generations.”
What keeps him going is his passion to transform ARA into a global name. He gets inspiration from his golf buddies who are older than 70, yet continue to run their family businesses. “Real entrepreneurs never retire,” he says.
Ultimately, Lim believes only time will tell if his decision to privatize was right. Regardless, this new phase will not change the singular philosophy on which he believes ARA was built: integrity. He says that if people hold on to this virtue, they will be irreplaceable.
“Technology can never replace integrity,” he says, smiling. “That’s why the ‘Terminator’ day won’t ever come.”