On
the positive side, private equity (PE) property investments, in general, are
not always directly related to the economic cycle and hence can escape the
adverse impact of market volatilities.
And
because of this, investing in Asian PE property fund of funds depends a lot on
picking the right manager, with the right portfolio, and the right investment
strategy at the right time. Not an easy call to make.
Despite this tall order, Puay Ju Kang, head of
property, Asia-Pacific, for Aberdeen Asset Management Asia Limited, is positive
on the prospects of the firm’s Asia-Pacific property business.
Aberdeen has three types of property fund
businesses. These are: direct investments, investments in listed property
stocks, and investments in PE funds (through funds of funds). Its total
property asset under management (AUM) amount to US$30 billion globally. About
US$5 billion of this is in the fund of funds business of which about US$1
billion are Asia-Pacific AUM.
Kang attributes her confidence to the success
of two PE property funds currently managed by Aberdeen; the first was launched
in 2006 and raised US$600 million in AUM and the second was unveiled in 2007
with US$208 million in AUM. The first fund has a 12-year maturity and became fully
invested in December 2010. The second was designed with a 10-year maturity and
became fully invested in March 2011. Both funds are currently well below their
respective leverage caps of 70% and 75%.
Addressing
market challenges
“Our funds have quite broad mandates; we are
allowed to invest across the Asia-Pacific region from mature to semi-mature to
emerging markets and across the risk spectrum from core to opportunistic, which
we continue to believe is the right approach. As a platform, we have exposure
to Japan, Singapore, China, India, Hong Kong, Australia, Thailand and Malaysia
so we have been able to achieve a high degree of diversification in our
products. We have invested in conventional asset classes like offices, retail,
residential as well as in niche sectors like healthcare and we have nursing
homes in Japan right now,” Kang says.
The key challenges facing fund of funds are
identifying and selecting the underlying fund managers. This was the case even
before the global financial crisis but it has become even more of a challenge
with market uncertainties.
“We have to find the right fit between manager
strategy and the strategy that we want. For example, we like Japan healthcare
because we think that it has a lot of growth potential. It is also a very
fragmented asset class but there is room for it to become more
institutionalized and therefore trade at a lower risk premium. This process of
institutionalization could generate significant upside. Then there are the
investment nuances to work out. Even if we say we like the healthcare sector,
we still have to decide whether we go into hospitals or just with nursing homes
and how much operational risk we want to be exposed to.
After that, it is my team’s job to go and look
for a product, and to the extent feasible, help structure a product,” Kang
explains.
Another challenge facing PE investment in
property is that this space is less transparent than other asset classes.
Kang’s team has to dig deep into each of the markets and each opportunity to
find the managers and the strategies that fit their goals.
The Aberdeen executive admits that the global
financial crisis has done its work of eliminating weaker fund managers while
bringing new fund managers to the market.
“In terms of quality of fund managers, the
crisis was in some ways purgatory. It was survival of the fittest so I think
those managers who were able to get through the crisis relatively intact are
now seen as strong contenders. They would be able to say they have successfully
navigated one of the worst financial crises in recent history,” Kang adds.
Separating
the wheat from the chaff
But the new fund managers who were not active
in PE before the crisis will be facing the same issues that they met
pre-crisis, particularly the lack of a demonstrable track record in managing
international capital.
“They may have a lot of experience in the
bricks and mortar aspect of the business or have a lot of relationships on the
ground in their respective markets but managing international capital is a
different ball game. We still have to scrutinize them to get the level of
comfort that not only do they know how to manage property, they also know how
to manage international capital in terms of understanding best practices and
requirements such as transparency, corporate governance, reporting and all
that,” Kang comments.
Aberdeen will soon be building a short-list of
fund managers in preparation for building its portfolio for Asia III.
In seeking to deliver a well-diversified
exposure across the region to investors without being pigeon-holed as an
opportunistic value fund, or just an emerging market fund of funds, the
investment team will have to look at each market closely and choose the best
strategies in line with investment targets or objectives, she adds.
Portfolio construction will cover investing in
each market according to the market cycle with the more mature markets as first
priority.
“We would want to start investing in mature
markets like Australia and Japan because of the cycle movement. In the case of
China and India, they are more long-term growth plays and we will not shy away
from these markets but we won’t be rushing into them either. There is no
doubting the growth potential of these markets but property investment can be
very micro, coming down to location selection, land pricing and how well a
manager can manage the delivery of a project, among others. Property is an
asset class that does not always bear a high degree of correlation to what’s
going on in terms of the economy. Just because the economy is growing at 10%
doesn’t mean that we will have a slam dunk in the property market,” Kang notes.
Aberdeen varies its investment strategy
according to market characteristics. In mature markets like Japan or Australia,
an investor can invest in a single-market focussed fund like an Australia commercial
fund or a Tokyo residential fund. It believes there are attractive
opportunities in these markets according to their respective market cycles.
This is not the same for a market like Hong
Kong where the property market tends to be volatile and cycles can be rather
short. For a market with these characteristics, Aberdeen prefers to invest
through a multi-market, multi-sector fund where the manager has the flexibility
to move money across different borders and markets depending on where the opportunities
are.
Bayani S Cruz
The Asset
Business & Investment Opportunities
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