Why is Schroders betting on Hong Kong for Asia expansion?

UK-based multinational asset manager Schroders is venturing into direct real estate investments in Asia-Pacific by betting on Hong Kong.

Schroders has agreed to acquire a 51 percent stake in Hong Kong-headquartered boutique real estate fund manager Pamfleet, according to a source close to the situation. Upon completion, the new entity will be named Schroders Pamfleet and will give the UK manager a $1.1 billion direct private equity real estate platform in the region with 19 investment professionals. Schroders had only recently started investing in real estate securities in Asia before the acquisition.

Both Schroders and Pamfleet declined to comment or disclose the terms of the transaction.

However, PERE understands that the two parties reached an initial agreement at the end of last year and had the commercial framework in place by February 2020.

The deal was struck despite the fact that Hong Kong, Pamfleet’s biggest investment destination, has seen ongoing social unrest since June 2019.

The city accounts for more than 60 percent of the investment firm’s assets under management, with the rest allocated evenly between Shanghai and Singapore. For instance, through its second fund, the $400 million Pamfleet Real Estate II, Pamfleet acquired seven assets in Hong Kong and another in Singapore.

Although the city has been challenged by the passage of the controversial national security law, covid-19 and broader geopolitical issues, Schroders remains bullish on Hong Kong as an investment market.

“The city does very much remain the New York of Asia and it is a gateway to mainland China. It is a powerhouse despite all sorts of uncertainties around it at the moment,” said Duncan Owen, global head of real estate at Schroders. “If you look at many of the real global cities, there are lots of question marks that come and go in cycles. We have to look through the cycle and take a long-term view. Hong Kong broadly speaking is great for pan-Asia activities.” Ultimately, Owen sees Schroders Pamfleet evolving into a Hong Kong-headquartered pan-Asia platform.

Although the negotiation process took longer due to travel restrictions, PERE understands the pricing of the acquisition was not impacted by the unrest and the pandemic, according to three sources involved in the situation.

One of the three sources said: “There are many managers in Western countries that are underrepresented in Asia and want to get representation. Meanwhile, there is a very small pool of acquisition targets that are suitable for them to acquire. The alternative is to do it through organic growth and that can take a huge amount of time.”

What also made Pamfleet attractive to bidders was its fresh pool of dry powder, the raised $450 million for its third value-add real estate fund last year, a second source told PERE. “It is cash rich. You would want to invest in the market in the next 12 months rather than a couple years ago when the pricing is going to be more attractive. Hong Kong has a very short cycle compared to other cities. When it recovers, it recovers very strongly,” the source said.

Going forward, Schroders Pamfleet plans to further build its business by expanding into a few additional “winning cities” in Asia, according to Owen. In particular, he looks to grow the firm’s footprint in China beyond Shanghai. The firm has an existing team and $150 million in AUM in China comprising four investments in Shanghai. “In due course, we will hire more new people and this is a natural evolution of a pan-Asia business,” said Owen.

Schroders’ private assets business managed £44.2 billion ($55.5 billion; €49.2 billion) in assets as of December 31, 2019. The acquisition is part of the firm’s ongoing expansion into the real estate fund business, having bought Munich-based value-add real estate specialist Blue Asset Management in 2019 and pan-European value-add real estate hotels team Algonquin in 2018.

Bigger-than-expected stake sale

Pamfleet was initially reluctant to sell a majority interest as the firm’s initial intention was to explore options for a minority stake sale for two of its founders, David Holdsworth and Bruce Walker, PERE understands. Holdsworth and Walker together owned an approximately 20 to 25 percent share in Pamfleet and were looking for a long-term exit plan, sources told PERE.

However, most of the parties who were interested in the minority stake sale were private equity firms that would have held the interest for a short period of time, but Pamfleet preferred a buyer that could help to grow its business over the long term, according to two sources.

It is understood that the principals at Pamfleet agreed on a majority sale with full control over the firm’s decision making and investment process after prolonged consideration.