Forum Partners has held a final close on its third Asia real estate fund at $375 million, with most of its investors comprising major institutions in the US and Western Europe.
Forum Asian Realty Income Fund III is a follow-up to the $650 million Fund II, which closed in 2007 and is now fully invested.
Challenging fundraising conditions in the West – where the firm’s primary investor base is located – led to a smaller third vehicle, says Merrit Maddux, the Hong Kong-based managing director of Forum Partners.
Fund III was launched in mid-2009, in the shadow of the financial crisis. The long fundraising period involved soliciting investors that were “coming out of the post-crisis period when it’s difficult to make decisions”, he notes.
About 60% of Fund III’s capital comes from existing investors, which include pension funds, university endowments, foundations and insurance companies based in the US and Europe.
The vehicle, which has a targeted internal rate of return of 20%, drew first-time investors to the firm, including a state-related insurance company in Singapore and a pension fund of a supranational organisation, says Maddux
Forum Partners differentiates itself from other private equity real estate firms in that it does not invest directly in physical property, but rather the companies that develop and own such assets. “We typically structure [our deals] by investing in debt with equity convertibility, so we have a senior position in the capital structure,” says Maddux. Fixed income-type returns are generated through debt coupons or preferred equity dividends.
Fund III’s focus will have a slightly different focus than Fund II, given the change in market conditions in recent years. In particular, there is a greater need for recapitalisations and rescue cases among private mid-sized property companies which own “high-quality real estate, but [have] capital structures that need fixing as a result of the financial crisis”, says Maddux.
Japan and Australia have well-priced opportunities for these deals, in addition to China, Korea and Singapore, he adds. Partly as a reflection of the deal prospects, Forum has launched offices in Sydney and Singapore in the past five months, adding to its existing operations in Hong Kong, Tokyo, Beijing and Seoul.
Fund III has already made six investments and has exited one, from which the capital will be put towards new deals, says Maddux. A recent transaction involved the recapitalisation of a private real estate vehicle in Australia.
More broadly, the Asian real estate sector has been rocked by the recent anti-corruption investigation of Sun Hung Kai (SHK), Hong Kong’s biggest property developer. Since March, the city’s Independent Commission Against Corruption has arrested four executives and a former high-ranking government official for an investigation under local anti-bribery law.
Maddux says the development is “idiosyncratic to SHK [and] wouldn’t really have an impact”.
He adds that Forum Partners avoids similar situations by developing long-term relationships with its portfolio companies and also performing investigative work into the backgrounds of company principals.