Cheetah enters real estate and activist strategies

Hong Kong-based hedge fund consultant looks for returns in niche strategies with longer lock ups.

Cheetah Investments, a Hong Kong-based hedge fund consultant that invests on behalf of its wealthy Asian clients, is preparing the launch of two new funds - a Japanese real estate fund, and a China activist fund. Cheetah's key investor and partner is V-Nee Yeh, a well-known value investor in Hong Kong.

V-Nee Yeh also co-founded Hong Kong's largest home-grown fund manager, Value Partners, which manages over $2 billion in AUM.

Raymond Wong, Cheetah's managing director, says the firm will shortly be launching a Japanese real estate fund, in conjunction with Hong Kong-based real estate specialists, Altus. Altus was founded by Arnold Ip, who spent his career in regional investment banking and private equity before launching his own firm.

To date Ip has successfully invested over $60 million in Japanese real estate backed by Taiwanese investors and a UK insurance company. Cheetah has now taken a stake in Altus' management company and has already had its first close at $50 million for a specialist fund that will invest in residential buildings in mid-size Japanese cities.

The fund will be employ leverage of between three to four times and therefore will be able to invest in assets worth up to $200 million. The fund will have a five-year term and will be structured like a private equity vehicle.

"The Altus team is very experienced in their strategy," Wong explains. "They have a good network of brokers, and access to non-recourse bank financing and good contacts on the ground in Japan."

He also believes the timing is right for the investment, pointing out that regional residential properties are yielding double-digit returns compared to similar properties in large cities that are yielding less than 5%. He says the differential can be explained by the fact that regional banks still have high NPL ratios although he expects the gap to begin narrowing in a few years time.

While the Altus team will not get involved in developing properties they will endeavor to increase occupancy rates. Wong expects the investment to pay out a dividend of 6%-8% per annum of free cash flow for investors, in addition to the profit made via disposals at the end of the period.

Another niche where Cheetah has found value is what Wong refers to as "Chinese-style activism."

Wong explains that many listed Chinese companies still have a substantial portion of their shares owned by state owned companies. These are known as C-shares or legal person shares.

"These shares have the same legal rights as A-shares, but are not freely traded," he says. "They need to be bought by block trades and government approval."

The fund will focus on purchasing C-shares and then exiting by selling the shares at a premium to strategic investors, most likely multi-national companies looking to gain market share in China. In the meantime, the fund will add-value by working with the management to help the company restructure the business to make it more attractive to strategic investors and also work on identifying and negotiating with these investors.

"This is shareholder activism, the Chinese way," notes Wong.

He says Cheetah has teamed up with a specialist manager who has worked with multi-national companies in China and has already implemented this strategy successfully.

"We expect to launch this strategy with at least $100 million. However the opportunity set is in the billions, and if the deal flow is good we see the fund growing to several hundred million dollars," he adds.

The last few years have seen Cheetah guide investors into long only absolute return funds in Asian markets where they see a case for value-based strategy. Cheetah has teamed up with equity long/short fund managers to launch long only Japan and Korea funds, both of which have been top performers in their categories.

In Japan, Cheetah partnered with hedge fund manager Arcus to launch a $100 million fund primarily focused on small caps. The fund has returned 58% to date since its December 2003 inception.

In Korea, a joint fund with Cosmo currently stands at $60 million and has returned 43% since its inception last year.

Wong says that next in the pipeline is an Asia ex-Japan long/short fund, although details of the new fund are still under discussion.